What is an Annuity?
In simple words all annuities can be defined as financial products which are arranged in an agreement between the insurance company and you.
You will pay the premium over time and insurance company will repay you in future at regular intervals. There are a number of types of annuities and different terms can be set up.
Various Types of Annuities
One can select from different types of annuities. Some of the annuities offer payouts or other different benefits, but there are few kinds which are more common than others.
A single premium or an immediate annuity is paid for upfront along with a lump sum and it provides guaranteed income. They are commonly bought by the people who are close enough to retirement and want guaranteed payments.
Pensions can also be included in types of annuity, because a fixed rate is paid to the retired person which is based on different factors which are related to their career.
Lottery annuities are the agreements which are made when people win lottery, which instead of giving a lump sum amount upfront; spread the payment over several years.
In deferred annuities, payments are delayed and the annuity accumulates. These are then paid in different ways upon reaching the payout phase. They have certain tax advantages.
History of Annuities:
Annuities were some very basic tools for investment in the old days, just like pensions. The recipient was paid an amount which was predetermined over a predetermined time period, and guaranteed income was setup for the owner.
With time, the annuities got specialized more and more in order to meet the wishes and needs of different investors. This has resulted in different terms on certain things like guarantees on income and payment terms, survivor benefits. Structured settlements can also be included in the definition of Annuities.
Structured settlements are a whole category of annuities which arises because of a legal agreement, mostly after a lawsuit. The plaintiff and defendant will come to an agreement on the needs of the winning party in future. After that the defendant puts money in the structured settlement, which is maintained by independent third party like an insurance company. In some of the cases there may be a partial lump sum with partial payments.
Structured settlements may arise as a result of lottery winnings, wrongful death suits, workers compensation, or insurance settlements or personal injury.
Benefits of Annuities:
Annuities have different advantages. These include:
- They give you an opportunity to grow the money tax deferred, you can enjoy all the gains and they help you to make more efficient investments.
- They are mostly viewed as quite stable and safe investments. Mostly they are backed by the insurance companies. The recipient does not have to worry about receiving the payouts.
- Annuities give you an opportunity to earn money for the rest of your life. It is quite important in giving some stability in case a person lives longer than they prepare for when amassing savings from retirement. It’s worth it to have a backup plan just in case you fortunately live longer than an average person.
- The risk is also eliminated and it is a big benefit. Insurance company takes the risk. You do have to worry about any risk factor when projecting how much money you will be receiving. This simplifies the things, and this is exactly why annuities are very popular with people who are nearing retirement.
Disadvantages of Annuities:
- They are complicated options for investment which include a number of extra fees and expenses, along with administrative charges. They also tie up the money for a certain period of time, so the flexibility is taken away and you have to remove some options. In case you think that you have a chance that you will need the money anytime sooner, then you should avoid annuities.
- Tax penalties are also there in case a person decided to pull out his funds from an annuity before they turn 59 and a half. Because of this many people avoid annuities.
- After weighing all the pros and cons, you can decide if the annuities are the right option for you and if you should buy them, hold on or consider selling.