Can someone explain to me how an annuity works?

Question

I have paid for life insurance on my kids since they were born. They are now ages 23 & 21. My husband thinks we should change the policies to annuities but I am not very familiar with how they work, what are the pros, cons etc.

Answer 1

When an annuity is paid out is usually paid out in payments over a set number of time. Pros: You always know when it's coming, and can schedule for taxes to be with drawn. Con: Can't get access to future payments with out penalties and have to pay a larger tax if you get it in one lump sum.

Answer 2

annuities are plans that provide for regular income to an individual, normally after retirement. the individual keeps contributing towards this plan during his/her earning years so as to build up a kitty by the time of retirement. on retirement the individual has the choice to choose his/her kind of annuity viz.... pension for life, pension for self and spouse etc... it might not be a good idea to convert the life insurance on your chilren's lives into annuity as they would be cancelling an insurance which started early in life and by virtue of which, might be actually very cheap. in any case, please consult with a qualified insurance/retirement planning advisor.

Answer 3

Annuities are just as bad an idea as life insurance on infants.  They're savings accounts for people who are really bad at math.

Cash out those annuities, and start a Roth IRA with the procedes for both kids.  

Effectively, you're going to give the money to an insurance company - part of that money will pay commission to the sales guy.  THe rest will be invested.  The insurance company will pay you 25% of the interest, AND charge you fees each year based on the balance of your account.  They keep 75% of the interest, AND the fees.   Oh, and if they have a bad year, and the account LOSES money, they still charge you fees.  Then, 30 years from now, when they've made hundreds of thousands off of you, they'll start paying a couple hundred a month to the kids.  

Insurance companies are in it to make money.  They make A LOT of money off of life insurance for babies, and annuities.  You will make your broker rich that way.

You can do much, much, much better on your own, even if you only stick it in a certificate of deposit.

Answer 4

Funny the above mentions its a bad idea.  Annuities are only bad when the insurance companies keep all the money.  A friend of mine just go a MetLife VA from his agent that would pay him for life bassed on the highest amount his VA had.  Meaning, if it peaked at $800k on his anniversary, he would be paid 5% of that for life even if his account when he retires has only 200k in it.  And if his balance was ever higher on that date, his payments would go up as well.  When he crokes, his family gets the money.

He never has to give up his money to the insurance company.  I've read the docs, what he said was true.