There are many reasons to purchase an annuity. One example might be to prevent becoming a burden to your children. Another might be to help pay for nursing home expenses. Some enjoy the idea of a supplemental retirement income. A 2002 survey concluded that 83% of those polled stated that they purchased an annuity in the event they lived beyond their life expectancy.[1]

An annuity is not only something to think about in the case of living too long. It can also be an advantageous way to contribute toward your financial future. The following features show the advantages of a fixed annuity and whether it should be a part of your financial portfolio.

Lifetime, Dependable Income

An annuity is a contract between an individual and an insurance company. Within this contract is an agreement that the company will pay a guaranteed income to the annuity holder in exchange for their contract payments. Among other factors, the level of income is dependent on interest rates and the length of time until income distribution begins.

Superior Flexibility

An annuity can be customized to meet the contract owner's specific needs. Depending on the terms of the contract, an annuity owner has free reign to decide when and how they want to receive income. The duration of income payments can be determined in advance. Some annuity owners choose the highest income option for their lifetime only, while others appreciate the security of a joint and survivor benefit for their heirs.

Tax Benefits

Because there are no legally mandated distributions from an annuity, your investment reaps the benefit of tax-deferred accumulation. Although annuity premiums typically are not tax deductible, earnings grow tax-deferred, and ordinary income taxes are due only upon withdrawal.

Purchasing an annuity can ensure that there will be enough income to last throughout retirement, and also take care of any unexpected expenses.

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1⁄2, may be subject to a 10% federal income tax penalty. Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

[1] Annuity Fact Book, National Association for Variable Annuities, 2002

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