If you are planning for your retirement, chances are you have heard the term “annuity” before. But what is an annuity, how do they work and is it the right investment tool for you? Nysurance is happy to provide the answers to some commonly asked questions regarding this product that is often perceived as complex and difficult to understand.

What is an annuity?

Annuities are most often used as a retirement planning tool to help guarantee a steady source of income once the annuity holder stops working. An individual would accumulate money while gaining interest in an annuity account while still employed (accumulation phase) and once they retire, they would begin to draw monthly payouts to replace their loss of income (annuitization phase). Annuities are often used for estate planning purposes because during the accumulation phase, taxes are not applicable.

If the holder dies before the annuitization phase is achieved, the beneficiary would either receive the face value of the annuity or the total amount that has been deposited, whichever is more. If the holder should die during the annuitization phase, the beneficiary would only continue to receive payments if a “term certain” annuity was purchased. This type of annuity ensures that the beneficiary continually receives a specific number of payouts even after the holder’s death.

There are three types of annuities – fixed, variable and equity-indexed annuities. Fixed annuities earn a guaranteed, level rate of interest during the accumulation phase. Variable annuities are subject to market fluctuations and may earn more or less interest depending on the economic climate and what the money is invested in. An equity-indexed annuity is a combination of both previous varieties and offers a guaranteed interest rate while also have the opportunity to earn additional interest depending on the performance of any number of stock indexes.

Who should purchase an annuity?

Typically, annuities are best suited for those over the age of 55. Because there is a 10% penalty tax for those who withdraw money from their investment before the age of 59 ½, excluding withdrawals made as a result of death or disability, younger individuals aren’t as likely to use this particular product.

Contact us today for more information about New York Annuities and our useful retirement planning tools.

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