| Selection Strategies | Tracking Annuity Performance
The primary difference between traditional life insurance and annuities is that life insurance guards against "dying too soon" and annuities, in essence, can be used as insurance against "living too long." To summarize, if you buy an annuity (usually from an insurance company, which invests your funds), the company will return a series of periodic annuity payments. If you choose to take the annuity payments over your lifetime (there are many other options), you will have a guaranteed source of "income". If you "die too soon" (that is, you don't outlive your life expectancy), the number of annuity payments you will get back from the insurer will be less than you paid in (how much less depends on when you die.) On the other hand, if you outlive your life expectancy, you could get back in annuity payments far more than the cost of your annuity (and the resultant earnings). By comparison, if you put your funds into a traditional investment, you may run out of funds before your death. A tax deferred annuity means that earnings during the term of the annuity are tax-deferred; you are not taxed on your earnings until they are paid out, at which time they are taxed as ordinary income. Your funds have the chance to grow more quickly in a tax deferred annuity, than they would in a taxable investment. Tax deferred annuities are particularly well-suited for funding retirement. A retirement annuity is a tax deferred savings plan, designed to provide an income stream-- either at some future date or immediately One negative aspect of a retirement annuity or tax deferred annuity is that you generally cannot get to your money during the growth period without incurring penalties. The tax code imposes a 10% premature-withdrawal penalty on money taken out of a tax deferred annuity before age 59½ and insurers impose penalties on withdrawals made before the term of the annuity is up. The insurers’ penalties are termed "surrender charges," and they usually apply for the first few (three to ten) years of the annuity contract. These penalties lead to a de facto restriction on the use of annuities primarily as an investment. It usually makes sense to put your money into tax deferred annuities if you can leave it there for at least a few years and the withdrawals are scheduled to occur after age 59½ . These restrictions explain why the best annuity to meet retirement needs is a retirement annuity where the depositor will be at least 59½ before withdrawals begin.
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