To put it simply, an annuity is a contract between you and an insurance company that can provide you with a reliable income stream for a certain period in exchange for a lump-sum investment or series of investments.
The way these products are designed, the contract owner made either a lump-sum payment or a series of payments into the contract and then began receiving payments at retirement. The payments into an annuity are used to purchase accumulation units inside the contract, which, as their name implies, accumulate inside the contract until the time that payments to the owner or in case of the owner’s death, to the beneficiary must be made.
There are three main types of annuities: fixed, fixed indexed, and variable. Depending on your timing and income needs, you may choose an immediate annuity, which begins paying income ASAP, or a deferred annuity, which gives you the ability to grow your investment account and income potential.
- In a fixed annuity, you get a guaranteed rate of return based on current interest rates and periodic payments in a fixed amount based on your account value at the time you decide to receive income. These payments can last a certain amount of time, like 20 years, or for life or the lives of you and your spouse. The longer the payments are set to last, the less the payment amount will be.
- A fixed index annuity gives you the chance of earning a greater return than a fixed annuity typically based on the performance of the S&P 500 index. However, Fixed Index Annuities credit interest to your annuity based on a formula (determined by the insurance company and outlined in your contract) that decides how additional interest from the index is calculated and credited to your contract value. Indexed annuities also guarantee a minimum contract value, regardless of index performance.
- A variable annuity gives you the option of investing your premiums in professionally managed portfolios, therefore offering greater growth potential. However, you can also lose money based on how your investments perform, and just as your rate of return varies, your income will as well.
Term life insurance provides protection for only a specified period of time – usually 10, 15, 20 or 30 years. There is no cash value associated with term life coverage, which is why premiums are often lower than for other types of insurance. Some term life policies may offer greater flexibility such as terms for return of premium and the potential to convert to whole life insurance.
Permanent life insurance lasts for the life of the insured. The policy accrues cash value and the payout is assured at the end of the policy if the policy is kept current. Whole, universal, variable, and single premium life are all types of permanent life insurance.
Whole life insurance provides protection for the entire life of the insured and provides a set level of security for your loved ones. You can borrow against the policy's cash value, as it accumulates over time, to help cover unforeseen expenses. Policy loans and withdrawals will reduce available cash values and death benefits and may cause the policy to lapse, or affect guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and you should consult a tax professional.
Universal life insurance provides protection for the entire life of the insured and builds cash value over time while offering flexible premiums and a flexible face amount. This type of insurance may be ideal for retirement planning or any number of other long-term goals.
A 401(k) is a savings plan that allows you to automatically invest part of your paycheck in mutual funds, bonds and company stock. Your choices will be limited to the specific investments your company offers through its plan, but you get to choose (up to specified limits) how much and where to put your money. Your 401(k) contributions also come out of your paycheck before taxes are applied, reducing the amount of money the government can tax. And 401(k) returns grow tax-deferred until you withdraw your money in retirement. Also, many employers offer a match on your contributions – say, 50 cents for every dollar – up to a certain percentage of your salary. So what’s the catch? Well in this case, you can’t withdraw the money tax free while you are employed before age 59½.
Employee 401k contributions are automatically deducted from their paycheck each pay period. This money is taken out before the employee’s paycheck is taxed. The contributions are invested at the employee’s direction into one or more funds provided in the plan. Employers often "match" employee contributions, but are not required to do so. While the investments grow in the employees 401k account, they do not pay any taxes on it. 401k plans have proven to be popular with employees for several reasons. The tax deferral is obviously high on this list of reasons. Others include the increased portability of this plan, employer matching contributions, and the increased control associated with self-direction of investments. 401k plans are subject to numerous and complex rules, regulations and tax qualification requirements. Be sure to consult with a qualified professional before making any decisions.