How Does An Annuity Work?

How_Does_An_Annuity_Work_RSL_FundingOver the past 50 years, solidifying the proverbial nest egg has been a top priority for most Americans. 401(k)s, insurance policies, and other strategies like annuities can ensure that income remains steady after the paychecks stop. But how does an annuity work, specifically? Is it the best option for someone wanting to keep costs down? Is an annuity payout over time more cost-effective than a lump sum payment? Let’s dig a little deeper to find out.

What is an Annuity?

An annuity is essentially an insurance policy whereby funds are distributed to an insured person over time. It’s a great option for people who are looking for a predictable payment every month (or quarter). You make the initial investment and then payments are sent to you on a future date (or dates if the payment schedule is broken up).

Fixed Annuities

Fixed annuities ensure guaranteed payouts and guaranteed rates of interest while variable annuities are a tax-deferred retirement medium where payments are based on the performance of the investments you choose. If you’re more comfortable knowing how much, and when your payments will be waiting in your mailbox, fixed annuities may be the better choice. In either case however, you will have to pay taxes upwards of 3 percent. Fixed annuities are also the more predictable option, but they aren’t exempt from its own set of surprises for annuity owners. Their rates can be fixed for a limited time, but the rates can change from year to year. There’s also the devaluation issue to consider: annuities do not take into account the rate of inflation. If you receive payments over time, the purchasing power will naturally decline.

More About Structured Settlement Annuities

Certain annuities – Scheduled payments are guaranteed for a set period of time. If you die, your beneficiary will receive the remainder of the annuity payout.
Lifetime payments – The payments you receive are only valid during your own lifetime. Beneficiaries will not inherit your payout.
Life with period certain – Payouts are made to the insured during his or her lifetime or to his or her beneficiary according to the terms of a guarantee provision. If the insured dies within a certain time period, his or her beneficiary will receive the remaining scheduled payments.
Joint and survivor annuity – Your beneficiary will continue to receive payouts for the rest of his or her life after the insured dies.

Many times, having an annuity means paying exorbitant management fees, high taxes, and a commission fee for setup. Selling all or part of your annuity can mean having cash on hand to pay medical bills, lower debt, or handle emergency situations on the financial front. Opting for a lump sum cash for your structured settlement annuities may be one of the smartest decisions you can make for yourself. But as with anything that’s worth it, do your research, stay informed, and speak with one of our RSL Funding representatives if you have specific questions—we’ll let you know if selling your annuity is in the cards.