Why Annuities Can Play An Important Role In Your Financial Planning

By Author: James Millington
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Here is some information that explains why annuities can play an important role in your financial planning. Financial planning involves a myriad of goals. One of the most important goals is to make sure that you have a source of steady income during your retirement years. An annuity is a tool that will give you a guaranteed income that can function as a safety net.

An annuity is an insurance type contract that is purchased from an insurance company. You make a large single lump sum payment or a series of smaller payments of a period of time. Starting at a designated date you will receive a monthly income that will last the rest of your life. Some annuity contracts allow you to specify a beneficiary who will receive a death benefit when you die.

There are several variations on this basic model for an annuity. Some annuity contracts do not make payments for life but instead make monthly payments for a set period of time. For instance, the contract may call for payments for twenty years.

The rate of return offered by an annuity contract can be a set rate of interest. It can also be linked to an investment portfolio ...
... of stocks and bonds. This type of annuity is called a variable annuity because the monthly payment can vary based on the results of the investment portfolio. Still other types of contracts are tied to a financial index such as the Standard and Poors 500 or the DOW Jones Industrial average. These types of annuity contract are called an indexed annuity.

The main advantage of an annuity is that it gives you a consistent steady monthly income. No matter how good or bad the stock market is doing at any one time, you can always count on the income from this financial contract. It may not be a large income but, unlike your savings, it can never be exhausted.

An annuity is not intended to be the sole investment vehicle for a financial plan. A financial plan ought to include a diversified portfolio. It should include stocks, bonds, certificates of deposits and perhaps real estate. Some people also include gold and other precious metals. The purpose of an annuity in a financial plan is to make sure that you do not exhaust your savings if you should live to a ripe old age.

Some critics say that the rate of return with an annuity contract is too low. They say that history shows that a portfolio of stocks have a bigger rate of return. This may be true. However, the purpose of an annuity contract is not to earn incredible investment returns. As pointed out earlier, the purpose is to provide a monthly income that will never be exhausted in your lifetime.

Annuities have an important role to play in your financial plan. It will give you basic financial security and peace of mind. Consult with a financial planner or an insurance broker to learn more about how they work. A skilled financial planner or insurance professional can help set one up that is appropriate for your particular situation.
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The open market option and using an independent adviser will help you find the best annuities.