Annuities are agreements in which you pledge to give a single lump-sum payment or a series of smaller payments to an insurance company in exchange for receiving a series of payments in the future. What makes annuities attractive to consumers is that the series of payments offered to customers in the future is ultimately worth more than however much money was paid upfront.
Here are a few things everybody needs to know about annuities.
Structured Settlements Aren’t True Annuities
Structured settlements are arrangements to settle legal debts resulting from judgments handed down on personal injury cases.
You should know that structured settlements are not, in fact, true annuities. Rather, they simply take the form of annuities. Here’s another similarity between the two – structured settlements award regular payments to injured claimants either for a set number of years or for life, just like annuities.
People Use Annuities To Defer Tax Payments
One of the cornerstones of tax planning is to defer tax payments as frequently as possible. This proves advantageous to tax filers thanks to the time value of money, an ideology that suggests a dollar is worth more now than it will be in five years due to inflation.
It makes more sense to pay taxes later instead of sooner because of the time value of money. One of the most common reasons why people purchase annuities is to put off paying taxes, ultimately placing buyers in better-off financial positions.
Changing Investments Is Tax-Free With Annuities
People’s investing goals change over time. To best reach certain investment goals, financial advisors recommend picking up different investing strategies.
With mutual funds, for example, there are tax consequences for switching up what items your investments are allocated toward. The same can’t be said for annuities. Holding annuities gives you a way to rebalance your investments to meet changing investment goals. The more likely your goals are deemed to change in the future, the heavier your portfolio should be on annuities.
Fees For Annuities Are Far Too High
While it is true that you’ll be asked to fork over more fees for annuities that are meant to serve increasingly specific interests, general-use annuities’ fees are quite low.
Right now, the industry average is 1.16 percent for variable annuities’ yearly fees, though they can range as low as 0.10 percent, according to Morningstar Annuity Research Center.