What Is an Annuity Plan?

what is an annuity plan

Annuity plans offer guaranteed pension payments if the insurance company is strong.

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An annuity plan offers a pension, either monthly or as a lump sum, to insurance company policyholders. It offers tax-deferred income equal to premiums paid by policyholders and their account earnings. These plans include interest and account growth, just as individual retirement accounts do. They typically offer fixed monthly income for the life of the policyholder or lump sum options. Annuities are among the most misunderstood retirement products available.

Fixed or Variable

You typically have two choices of annuity plans. One offers a fixed rate appreciation, involving secure investments, such as corporate or municipal bonds, government obligations or highly rated corporate debt instruments. Your interest rate and earnings are usually low but secure. Another option, variable rate annuities, normally invest in equity instruments, such as stocks. You face more risk but have the opportunity to receive much higher earnings on your

account.

Mutual Fund Similarities

Annuity Plan Risks

Along with the security offered by an annuity plan, you'll face two challenges. The historically small returns on insurance company annuity investments are one challenge. Second, you must be sure that you're investing in a strong insurance company, as its future failure could jeopardize your principal. Should your insurance company file for bankruptcy protection, your perceived lack of risk is gone, as you may lose your account principal. However, if your primary concern is minimizing risk and maximizing security, an annuity plan may be attractive.

Tax Considerations

Annuity plans do not offer current year tax deductions. They do offer tax deferrals. Their guaranteed returns and fixed income features are beneficial, but they're not necessarily the most attractive options for your retirement funds. For those who place high value on structure and guarantees for their retirement accounts, an annuity plan is a good choice. Those seeking strong account growth will have better options.

Annuity Plan Investor Focus

Source: finance.zacks.com

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