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Annuities Explained

Annuities are the series of set amount and frequency of payments paid to retired people. The following article 'annuities explained', will help solve all your queries regarding annuities.
WealthHow Staff
Retirement Fund
An annuity is a contract made between a person and an insurance company, that will help provide a regular income in exchange of a lump-sum pay or the investments made over time to the insurance company. If you are thinking of investing your money to make your retirement safe and secure financially, then annuity is the best retirement product. The annuities explained in this article will help you make a better choice for safeguarding your future.
Annuity Definition
Many insurance companies define annuity as an investment type that will guarantee payments of specific amounts at specific time intervals. This amount can be received as a periodic interest or a lump-sum payment. Thus, an annuity is a regular income that is paid after making one lump sum payment. This is only after one invests in an approved, pension scheme that is tax free. Most of the annuities are risk-free and come with a guarantee for life. Insurance companies will calculate one's age (male or female investor) and the size of the pension fund. Based on other circumstances, like your health, they will decide how long you can continue to receive the annuity amount.
This means you pay money for a set period of time. Once you complete your last payment, you will begin to receive regular payment for a set period of time. This period is often for the rest of one's life. This is a good investment for those, who think social security income will not be enough after they retire. So, till the investor lives, he/she will receive monthly payment. In some cases, after the death of the investor, the spouse may receive the amount. This depends on the type of annuity your purchase. If you are wondering, what if the investor dies before the estimated life span. Well, he/she will receive less money. But, if he lives beyond the estimated life span, he will continue to receive the amount.
Types of Annuities
There are different types of annuities that are useful for different types of investors. If you know the types, then understanding annuity will be easier for you. The most common types of annuities are immediate and deferred annuities.
Immediate Annuities
Immediate annuities are for those who are ready to pay a large sum of money upfront. This will help you receive payments with a specified rate of return every month. You no longer have to wait for years to start receiving the payment.
Deferred Annuities
These annuities are commonly used, especially by the employed class. Here, one pays a specified amount of money for a period of time. After the period is complete, they will start receiving monthly payments.
Types of Annuities Payment
There are two types of payments for annuities: fixed annuities and variable annuities. Read on to understand fixed and variable annuities explained below, to make understanding annuities easier for you.
Fixed Annuities Explained
A fixed annuity is the established payment that is announced by the company, on an annual basis. The principle is guaranteed by the company and it can never decline. Interest is added to your deposits every year, by the insurance company. The annuity is specific to the term selected. Longer the term, higher the interest to be paid. The interest is tax deferred, till it is not withdrawn from the account. Only 10% of the balance can be withdrawn annually. Surrender charges or withdrawal penalties are to be paid if there is more than 10% withdrawals in a year. Many companies offer an initial one year rate, that changes each year. Other options available with a few companies, are the multi-year guarantee annuities, that have a locked-in rate for the entire period.
Variable Annuities Explained
In variable annuity, you do not receive interest from the company, but it is invested in mutual funds. This may help you earn more money or lose more on principle, depending on the mutual fund selected by you. The best option over fixed and variable annuity is the index annuity.
Equity Indexed Annuities Explained
Equity indexed annuity pays an interest rate according to the performance of a common or well-known index, like the SP500. The annuity growth is based on the participation rate of the index or the stock market it is tied to. In this way, you never lose your principle. This helps guarantee you with a fixed annuity, that has a potential of earning a profit like a variable annuity.
Life insurance annuities come in different types, like immediate annuities and deferred annuities. Life annuities suited for a retried person are the immediate annuities. The immediate annuities give them a steady stream of income, that is reliable. If a younger person is choosing a life insurance annuity, then he should obviously opt for the deferred annuity. This is the most common choice, as the money is tax-free, till it is not withdrawn.
The Good and The Bad About Annuities
Like every other investment, there are advantages and disadvantages of annuities. The most lucrative and advantageous point of an annuity is the tax benefit one can get from investing in this investment. Only the gains made on annuities are taxed. Most of the investors have low-income during their retirement. Thus, they are taxed at a lower rate. Also, there is no limit to the amount of money one invests. Another benefit of this plan is guaranteed income annuities. This means, investors do not have to fear the ups and downs of the market. They will get a guaranteed rate of return, in spite of the market trend in case of annuity.
Coming to disadvantages, when choosing an annuity, take care to understand the fees related to it. There are generally annual charges to be paid. You also should know all about the heavy surrender charges that are put, when withdrawing money within a certain period after opening. You should make sure that you opt for a guarantee to be added on to the annuity, for a period of 5 to 10 years. This because, God forbid, if you die the day you receive the annuity, after handing over your hard-earned pension, your estate suffers a hefty loss and the insurance company comes earns a large profit! So to make sure that your family at least earns the annuity, you should opt for a guarantee. Keep your personal situation in mind and keep your choices open. Compare all the features of annuity offered by different companies, before choosing the one that suits your requirements. One cannot predict the future and the market index, thus make sure you are through with your present and secured with your future, from any unforeseen calamity.
Annuities are good for investors who do not like taking risk with their money. If you want to hold on to what you have, then go in for an annuity plan. Those who are seeking higher profits or significant changes in their investment, they should try some other investment plan. Annuities explained by a professional will help you understand your choices better. Make sure you do thorough research before investing.