Anyone who has explored the world of investing and saving for retirement has probably come into contact with annuities. Annuities can be quite complicated and difficult to understand, so we present in this article some of the most frequently asked questions about these financial vehicles.
Just what is an annuity?
An annuity is an investment that can be purchased from an insurance company. The holder of the annuity pays premiums, and in exchange he or she is entitled to a set of guaranteed cash payments at predetermined intervals for the life of the annuity.
When is an annuity a good choice?
There are many reasons people decide to purchase annuities, but some of the most common are to provide living expenses in the event of disability or retirement.
Annuities can be an important financial planning vehicle for those seeking regular, predictable income over an extended period of time. Any qualified life insurance agent can recommend a suitable annuity for their customers.
What kinds of annuities are available?
There are a number of different annuities available, and they each serve a different purpose and are suitable for different kinds of investors. Some of the most common forms of annuities are:
- Fixed annuities – A fixed annuity earns a guaranteed rate of interest for a set term, i.e. one year, five year, ten years, etc. After the guarantee period has passed, a new rate of interest is determined based on the prevailing interest rates at the time.
- Variable annuities – A variable annuity often consists of other types of investments, including stocks and bonds. These annuities differ from fixed annuities in that the return is not guaranteed. Variable annuities can lose value, even all their value, if the underlying investment turns down.
- Immediate annuities – An immediate annuity is generally bought with one large lump sum payment, and a guaranteed fixed payment is provided immediately after the premium has been paid. An immediate annuity is often used to pay a set amount for the rest of the annuity holders’ life.
- Charitable gift annuities – A charitable gift annuity consists of a contract between you and a charity or foundation where you agree to donate a sum of money in exchange for future payments.
What are the benefits of an annuity?
There are a number of benefits that annuities enjoy, including:
- Annuities can provide a safe and secure level of monthly income for life.
- Unlike a life insurance policy, an annuity does not require a medical exam.
- Annuities can be structured to prevent the investor from outliving his or her money.
Those considering investing in an annuity should contact their favorite insurance company to see what is available. Annuities are not right for everyone, but for many they can be a good choice.