What is an annuity? An annuity is a financial product that gives a fixed stream of payments to people. This fixed stream is mostly used by those people who have got their retirement from the office. For the sake of understanding it better, these basic contracts are issued by insurance institutions in which people invest. Investors can decide the date when they want their annuity to begin. They help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.
There are two phases in the annuity. One phase is known as the accumulation phase in which the funds are added to the annuity, while the other is the annuitization phase in which the payments are commenced. Going more deeper into the annuity concept; it can be divided into different structures, such as fixed, variable, immediate, and deferred income.
Understanding the concept of What Is An Annuity
People retire every year and then they are worried about where they are going to earn to support their living. Even if they have their pension coming into their account, but that is not enough. Everybody deserves to get enough money so that they can support their living and can fulfill different dreams after retirement. This is where annuity comes to play one of the effective roles it plays is to reduce the risk of uncertainty of getting money at old age.
Investors will always get a fixed or a variable amount in their account depending on the selection of their annuity. Annuities can also be created to turn a substantial lump sum into steady cash flow, such as for winners of large cash settlements from a lawsuit or from winning the lottery. Defined benefit pensions and Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass.
Different Types of Annuities
This is the annuity that starts paying out immediately without any wait. The investors can keep on investing and it will keep on generating money all the time but a fixed amount is observed.
This annuity starts at a time fixed by the investor at which he/she wants to start the annuity. Most people choose this deferred one as they can set up the date and can start getting the annuity when they need it. The duration of the disbursements can also vary. You can choose to receive payments for a specific period of time, such as 25 years, or for the rest of your life
These are safer ones because they will always pay the investor a fixed guaranteed amount when it will start. This annuity has two more types further. One is fixed immediate annuities in which the investor gets the money immediately but that too in a fixed quantity.
The other is the fixed deferred annuity in which the investor gets the amount after some time. Even in this, he gets a fixed amount on the predetermined date that he has chosen. The disadvantage of this predictability is a modest annual return, generally slightly higher than a certificate of deposit from a bank.
Well, businessman loves this annuity type. In this annuity, there is no fixed amount of payment. You will get a higher return depending upon the increasing price of your mutual funds in which you have invested. However, the risk of loss is also very high and sometimes can cause you a great loss. You can keep your payments saved for your retirement in your sub-account and can withdraw once you are retired or even before that.
This one falls right between the risky variable annuities and safer fixed annuities. However, its working is different. For example, you will get a reward according to the fixed prescribed amount but some of the reward portions are tied with the performance of the market. If the performance of that particular stock goes up with whom your fund is attached, you will get a higher bonus in the rewards.
Mostly the variable and indexed are criticized because of their extra charges and other complexities. For example, you might have to pay for the steep surrender charges. These are charges that you have to pay if you want to withdraw the money in the first few years of the contract.
Benefits and Risks of Variable Annuities
Basically for most people annuities are their retirement plan. In this plan, they will deposit money into their contracts throughout their service. Once it is completed and they get retired, they can start taking out the money slowly in different forms and amounts of payments.
All investments carry a level of risk. Make sure you consider the financial strength of the insurance company issuing the annuity. You want to be sure the company will still be around, and financially sound, during your payout phase.
Variable annuities have a number of features that you need to understand before you invest. Understand that variable annuities are designed as an investment for long-term goals, such as retirement. They are not suitable for short-term goals because you typically will pay substantial taxes and charges or other penalties if you withdraw your money early. Variable annuities also involve investment risks, just as mutual funds do.
Buying and Selling of Annuities
Insurance companies, banks, brokerage firms, and mutual fund companies sell annuities and you can buy them from them. But, always remember, read all the requirements what they are saying the contract. You must make it clear for the companies to specify all the fees in the contract.
Your most important source of information about investment options within a variable annuity is the mutual fund prospectus. Request prospectuses for all the mutual fund options you might want to select. Read the prospectuses carefully before you decide how to allocate your purchase payments among the investment options.
But remember if you withdraw money from a variable annuity too early, the insurance company will charge you for it. These charges as explained above are called surrender charges. So, always have a clear mind before withdrawing any annuity.