What is Principal?

In the context of annuities, the principal refers to the money you contribute to the contract. It's the foundation of your annuity, the initial sum you invest. It's important to distinguish this from the earnings, or interest, that accumulate over time. These earnings are often referred to as interest credits or gains.

Think of your principal as a seed. You plant it (contribute it to the annuity), and over time, it's nurtured by the interest it earns (grows). Eventually, you can harvest the benefits – a stream of income in retirement – from both the original principal and the accumulated earnings.

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Updated on

March 30, 2024

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Glossary

Principal

Here's a breakdown of some key points about principal in annuities:

Separate from Earnings

The principal amount you contribute is distinct from the earnings your annuity generates. You can access the principal you contributed without penalty after a certain period (usually ten years). However, accessing earnings before the surrender period might incur tax penalties.

Flexible Contributions

There are often flexible options for contributing to your principal. You can choose a lump sum payment upfront, or spread your contributions out over time through regular payments.

Tax Implications

In general, contributions to your principal may grow tax-deferred within the annuity. This means you don't pay taxes on the earnings until you withdraw them.

Understanding principal is crucial for making informed decisions about your annuity. By knowing how your principal works, you can make better choices about contribution amounts and how you might access your funds in the future.

Here are some additional things to consider

Guaranteed Minimum Return (GMR)

Some annuities offer a GMR, which guarantees a minimum amount of interest your principal will earn. This can add a layer of security to your investment.

Fees

Be sure to understand any fees associated with your annuity, such as surrender charges or expense ratios. These fees can affect your overall return.

Principal is the foundation of your annuity. By understanding how it works, you can build a secure and rewarding retirement strategy.

If you're considering an annuity, talking to a financial advisor can help you determine if it's the right fit for your financial goals and risk tolerance. They can also explain the different types of annuities available and how principal works within each option.

Principal FAQ

What is the Principal of an investment?

The principal of an investment is the initial amount of money you put into the investment. It's the starting point before any returns or interest are earned.