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What is a Guaranteed Annuity?

Article Details
  • Written By: Luke Arthur
  • Edited By: Heather Bailey
  • Last Modified Date: 22 March 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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A guaranteed annuity is a contract between an individual and an insurance company. With a guaranteed annuity, an individual will pay the insurance company a certain amount of money and then begin to receive payments from the insurance company after a specific period of time. This type of retirement planning tool can provide guaranteed income to the retiree as well as some tax benefits.

When an individual purchases a guaranteed annuity, he or she will enter into a contract with an insurance company. The insurance company will offer two forms of payment to the individual. The individual can make periodic payments over his or her working life or make a lump sum payment.

The insurance company will take the money paid by the individual and use part of it to invest in the market. The annuity will grow in volume during this time. After the individual is ready to retire, the insurance company will make monthly payments to him or her for a specific period of time.

At the beginning of the contract, the individual can decide how long he or she wants to receive payments. The individual could choose to have a guaranteed term of payments for a certain number of years. The individual could also choose to receive a payment for the rest of his or her life. When receiving a payment for life, the payment will be smaller than if it is set for a specific amount of years.

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One of the big advantages of a guaranteed annuity is that it provides some consistency for retirees. Unlike other retirement accounts, the individual will be able to see how much money is going to be paid to him or her upon retirement. This takes a lot of the guesswork out of retirement planning and makes it much easier. Many people prefer knowing that they will be able to receive something guaranteed upon retirement.

Another benefit of a guaranteed annuity is that it provides some tax advantages to the investor. The money earned from investment gains in the annuity is not taxable. The individual can leave the money in the account until he or she reaches the age of 59 1/2 and then pay taxes on the money as it is received.

Even though this investment is referred to as a guaranteed annuity, there is some risk involved. Since the investor is working with an insurance company, the money could be lost if the insurance company went out of business. While this is rare, it does happen from time to time.

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