In a sense, an annuity is like reverse life insurance. Instead of insuring against death, annuities are designed to protect against “longevity risk,” the risk that you will outlive your income and savings.
Basically, an annuity is a contract between you and an insurance company or similar financial institution under which, in exchange for a lump sum or ongoing premium payments, the insurance company agrees to make regular payments for either the rest of your life or for a predetermined number of years.
This important option for covering extended or long-term care has some real advantages, the least of which is a potential tax benefit. Previously, if the insured took an annuity withdrawal to cover costs associated with long-term care needs, they dealt with the associated ordinary income, gains-first tax treatment and paid taxes accordingly.74
On the other hand, there are the annuity expenses and fees, including mortality and expense (M&E) fees and administrative fees. These charges pay for any insurance guarantees that are automatically included in the annuity as well as the selling and administrative expenses of the contract.
Annuities can be classified as either immediate, deferred, fixed, variable, or indexed.
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