If youre afraid of a lawsuit, most states protect
at least some assets held in an annuity from creditors.
- Lorayne Fiorillo, author of
Financial Fitness in 45 Days
Annuities have been big business since the early 1990s because
they offer many different advantages wrapped up in one rather
convoluted investment. Whats important to remember about
annuities is to get help buying one--you need to understand
all the ins and outs, expenses and pitfalls before you take
the annuity plunge.
An annuity is basically a contract sold by an insurance company
that invests your premium for future growth. Once youre
ready to withdraw money--usually for retirement income--the
insurance company will distribute regular payments.
A deferred annuity allows all earnings to grow tax deferred,
which means you dont have to pay taxes on them until
you withdraw the money. At that time, you pay your ordinary
income tax rate, but only on the portion of each payment that
is considered earnings--not your original principal.
There are several different types of annuities, ranging from
those that can provide an immediate income stream to those
that offer unlimited long-term growth potential:
If youre ready to retire and have a lump sum of money,
an immediate annuity can guarantee you immediate income that
will last throughout your lifetime.
This is a safe haven that can preserve your principal, offer
a fixed rate of growth, and guarantee you income upon retirement.
Variable annuities offer maximum growth opportunities and
an abundance of self-directed investment options.
While an annuity offers a unique combination of advantages
that you cant find in any other type of investment,
it doesnt come without a price or without pitfalls.