November 4th, 2011
What is an Income Annuity? An income annuity is an investment option that allows a person to rollover money from a retirement savings or other account so that the money is paid out in regular intervals as a source of controlled income. These accounts are generally started with a lump of capital pulled from a 401(k) or from inheritances, for instance, and are available in two different types from many of the same companies that offer life- and disability insurance quotes.
Two Different Types Because people may consider the purchase of these guaranteed investment policies before they are ready to retire and receive the regular income, many companies will offer deferred income annuities. In this way, the money can be stored safely until the individual is ready for the payments to being, on a specified date. For those who are ready to leave the job market behind or who are already living in retirement, immediate income annuities are likely the better option.
Why Are the Baby Boomers Setting the Trend? Born at a time when there was a huge influx in population in this country, the baby boomers have had several things working against them as they prepared for retirement. Primarily, there are too many individuals for the government programs to cover the ever-growing costs of living in retirement. As a result of that and other factors, this generation was the first to be encouraged to stockpile funds for the future, using 401(k) and other plans. Additionally, the life expectancy of this group is much longer than it was for previous generations. Modern science and medicine, along with more knowledge about healthy diet and exercise has made it possible for people to live longer. Though a good thing, there are a few downsides to living longer. For one thing, these individuals are often forced to consider products like critical illness insurance and long term care insurance. There is also a need to save more to cover a longer post-retirement lifespan and after seeing the devastating hits on the stock market and other investment venues in recent years, baby boomers are looking for other available options.
Understanding the Differences Just as the best term life insurance companies will go into great length when explaining the pros and cons of term life insurance versus universal life, there is great need for a good understanding of the difference between immediate and deferred income annuities. Immediate income annuities involve a single lump payment to the account and will begin to pay out, generally, within one year of the account being opened. Deferred income annuities work slightly differently. First of all, a date will be set at the purchase of the annuity and at that time the income payments will begin. That date could be just eighteen months after the purchase or could be pushed out for ten years or more. Some people prefer to postpone the payments until later in retirement, as a sort of insurance against funds drying up too early in life. The wonderful thing about deferred plans is that it gives the individual a place to build funds without fear of an economic crash. Additional payments are typically made to the account after the initial lump sum to continue adding value, which will, of course, increase the regular payout thereafter.
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