Annuities Promise Income Streams

| March 18, 2019

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From the broadest perspective, an annuity works like a lot of other financial planning tools: You give up money now in exchange for more financial stability in the future. But annuities also have some significant differences — both strengths and weaknesses — when compared to other financial planning products. Exploring these differences can help determine whether annuities should be part of your financial plan or if they’d be a bad idea. First Things First: What Is an Annuity? Annuities confuse a lot of people, including some financial advisors, because they’re not actually investments in the technical sense of the term. Instead, an annuity is an insurance contract. You deposit a sum of money now in exchange for regular payments later in life, presumably after you’ve retired and no longer earn income. So why would you exchange a lump sum of money now for the promise of payments in the future? Couldn’t you simply put the money in an investment, a savings account, or an individual retirement account (IRA) until you retire? Those questions get at the heart of why annuities exist: With an annuity, you could continue to receive payments even after you’ve reclaimed all the money you spent on the annuity’s premium.

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