Are Fixed Annuities Good For You?

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Fixed annuities are income producing financial instruments purchased through a life insurance company or other financial organization. You turn over a certain amount of money and in return the life insurance company pays you a guaranteed income beginning immediately or at a specific time in the future. Fixed annuities guarantee a minimum interest rate.

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You can turn over this money to the insurance company in one lump sum or you may accumulate it over a period of years on a tax deferred basis. You pay the taxes when you receive the income. Should your fixed annuity be part of an IRA or 401(k) plan you may qualify for tax relief on the amount contributed to the plan.

As it is more than likely, if you receive this annuity payment at retirement, that the payment will be less than the income you earned before retirement the amount of income taxes payable would be at a lower rate.

Income derived from fixed annuities can be paid as follows...

• You can be paid an income for life. You will have a guaranteed income for the rest of your life; it does not matter how long you life. Upon your death, however, the income ceases even if the amount paid out is less than the principal you had invested.

• You can receive a guaranteed income for life with a guaranteed amount of payments. Let us suppose you chose a life income with payments guaranteed for 20 years, if you lived to age 100 your annuity payments would come to you every month, or whatever payment interval you selected, for the rest of your life. If you died, however, after receiving one payment your beneficiary will receive payment for nineteen years and eleven months. To put it another way payment must be made for 20 years.

• Fixed annuities also give you the option of choosing the joint and last survivor option. Let us say that you want to be assured that neither you or your spouse can outlive this income. The joint and last survivor annuity option provides for that. The income lasts until the death of the last person to die.

• You can also choose an income of a fixed amount. This income would last until the principal, including interest earned, is exhausted.

Many of these plans restrict early withdrawal from your annuity fund during the accumulation years by charging a fee if you should do so. In the latter years, however, there is usually no charge. You also have to pay income taxes on any withdrawal made from your fixed annuities.

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