Insurance-based investments are those in which are issued or underwritten by an insurance company. Mainly annuities or life insurance products. Like any other investment vehicle you should always consider a couple of factors before readily allocating funds. Some important factors include the types of products, the pros and cons of each, and your personal goals for retirement. How well do these vehicles match your goals? Along with these factors you should also consider the strength and quality of the issuing insurance company. That’s why it’s known as the brick house industry, because insurance companies are not going to be washed away. For almost 300 years, insurance companies have withstood financial calamities from the American Revolution to the Great Depression and most recently, the Great Recession caused by the housing bubble.
One such investment often offered in the industry is an annuity. This is a savings investment vehicle that is mostly used for retirement purposes. This is a written contract issued by an insurance company that will allow you a tax deferral on your earnings. Contrary to other investments you won’t owe anything at the end of the year when the annuity increases in value. Basically, you pay the annuity issuer. They (the Life insurance Company) invest the money for you and the issuer then pays the principal and earnings to you based off the distribution option you have chosen. The Securities and Exchange Commission defines an annuity as such:
“An annuity is a contract between you and an insurance company that is designed to meet retirement and other long-range goals, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.”
There are many different types of annuities available on the market. There are also several different investment choices and distribution strategies available. You should understand how annuities are taxed and also know who to select as the annuitant and beneficiary of your annuity. There are several other advantages as well. For instance, unlike qualified retirement plans, non-qualified annuities typically do not place a limit on how much you can invest and do not have minimum distribution requirements after the age of 70 and a half.
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