How to Set Up an Annuity

by Akeia Dixon, Demand Media
    Annuities lock away your money to build interest and payout later.

    Annuities lock away your money to build interest and payout later.

    Annuities are insurance products that can be used as a part of retirement plans or as a way to receive steady income over a set period of time. The amount of your contribution to your annuity is not taxed, but when you begin to receive or make withdrawals, the money that you have earned is taxed at the rate of your regular income tax. It is important to consider all aspects when setting up an annuity.

    Step 1

    Decide which type of annuity appeals to you the most. There are two types of annuities. The first is the fixed annuity in which the insurance company announces the payment amount on an annual basis. The other type of annuity is the variable annuity. With this type of annuity, the money is placed in a mutual fund and the amount that is earned is dependent on the activity of the mutual fund. One benefit from the variable annuity is that you, as the owner, can choose which stocks, money markets and bonds your annuity is invested in.

    Step 2

    Determine the type of payout you want. You can choose between an immediate payout or a deferred payout option. With the immediate option, you can begin to receive payments right away and throughout the course of the time period of your annuity. The deferred option allows you to hold off on receiving payment until a later date. This is ideal if you are preparing for retirement or if you are purchasing an annuity as a gift for a young child.

    Step 3

    Understand the purchase options, penalties and fine print prior to signing on the dotted line. Some annuity plans can hit you with a significant penalty fee if any money is withdrawn within the first five or 10 years. When purchasing an annuity from an insurance company, there is an agent involved; this adds on commission fees. If you purchase from an investment company, there is no reason to charge commission fees. When it comes to the way you purchase your annuity, there are two ways you can go about it. You can either purchase with a single payment or a flexible premium which allows you to make payments over a certain number of years. If you want the immediate payout option, you have to purchase the annuity in one lump sum.

    Step 4

    Contact the insurance company and sign the necessary paperwork. Once you have made the decision about which type of annuity is right for you and how you wish to purchase it, contact the company and sign the necessary paperwork.

    About the Author

    Akeia Dixon is a freelance writer who began her professional writing career in 2009 for various websites. She enjoys writing about natural health topics but also loves to research and write about her findings on any subject. She is currently in school studying psychology and sociology.

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