policyholders of annuities will select these vehicles in case they need a secure source of income in their future.
You are under no obligation to annuitize your annuity with an insurance company. This is one of the biggest misconceptions circulating today. Many investors only half read their annuity policies or, worse, they listen to others who are confusing a tax-deferred annuity with another annuity product called an immediate annuity.
A tax-deferred annuity gives you the option to annuitize, not the obligation. Most tax-deferred annuities will never be annuitized. Typically, an insurance company states that if you still have your funds with the company at age 90 and up, it will want you to annuitize. If you let the insurance company know in writing that you don't want to, it will usually give you another five years to make a decision. If an insurance company puts pressure on you to annuitize, you always have the option of cashing in your account or moving your annuity account to another insurance company.
An immediate annuity is typically purchased for qualified retirement accounts or for legal settlements. It is very different from a tax-deferred annuity. An immediate annuity is purchased with the annuity payment starting right away. Pension plans will typically purchase these for funding employee obligations such as paying workers' monthly retirement benefits. Retired workers are probably better off having their retirement income flow to them via an insurance company rather than counting on their former employer to make good on its promises. What happens if the employer were to sell out to another company or, worse yet, disappear?
Legal settlements typically use immediate annuities to ensure that claimants have a secure source of income for an agreed upon time period. This is usually done instead of giving a claimant a lump sum of money, which could be spent well ahead of future expenses yet to be incurred. In short, it is done for the claimant's protection.
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