Annuities--A lot of people think they are a ripoff, but you have to understand what you're doing.
I first heard about annuities long before I went into insurance. Talking to my mom and dad, they mentioned my dad had two $100,000 annuities. I asked how they worked. Well, you take $100,000, put it in an annuity, and when you retire, it pays you a certain amount per month for the rest of your life. At first it sounded like Steve Martin's old routine about how you become a millionaire--"First, you get a million dollars, then..."
Made no sense to me--until about 25 years later. Annuities need to be considered a long term investment. You don't put the 'emergency fund' or the rent in an annuity. It works because someone puts a lump sum of money, or makes regular contributions to an annuity, and it's given time to grow.And that will vary depending on the type of annuity you purchase.
There are basically three types; fixed annuities, fixed indexed annuities and variable annuities. I will only really deal with the two types of fixed annuities because I don't offer variables. Those are invested directly in the stock market and I'm not securities licensed. And there are reasons I prefer fixed type annuities.
A significant plus to annuities is that they grow tax deferred. This means that you don't pay taxes on the growth until you withdraw teh money. Generally this will be at retirement which presumably will be a point in time where your tax liability is less, so you are hit for less.
Fixed Annuities--These are pretty straightforward. You look at the length of time you want this to 'sit,' which can be anywhere from 2-10 or more years, at a specific interest rate per year. At the end of the time period, you can roll it over or move it to another annuity. Or whatever you want to do with it. Just be aware of any potential tax issues before you decide what you are going to do with it.
Fixed Indexed Annuities--These are relatively new and have good potential for growth, more than a fixed annuity. There are multiple crediting methods, or ways to earn interest, and depending on your risk tolerance, will decide which ones you go with.
Why Should I Buy an Annuity?