Understanding Annuities
An annuity can be described as part investment and part insurance policy, they resemble IRAs or savings accounts, and other times they resemble pension plans that generate an income, on probably a monthly base. An annuity can provide tax deferring benefits, long term growth, guaranteed interest rates, trust advantages and lifetime income, and assure principal and earnings from your savings.
It is a contract with an insurance company and you typically pay premiums into the policy to gain savings at a young age and the company pays the savings back to you in as a form of income at retirement, making a self-funded pension. The two major types of annuities are deferred and immediate.
Immediate annuities are called income annuities, because they give your money back as a source of income immediately. Deferred annuities can also be called savings annuities, because it builds savings for retirement. You will also need to understand the difference between fixed and variable annuity, where a fixed annuity offers a fixed rate of return, a variable annuity offers some flexibility.
They are considered insurance policies because your heirs or beneficiaries receive what you've invested into the account. Annuities have additional expenses, called a mortality and expense charge that is associated with the insurance part, and the expense can eat away at your returns.
They also normally have limited investment options, usually only the mutual funds, which makes it complicated to build a fully diversified portfolio. The major advantage of this annuity is that the insurance company sends you checks regularly for as long as you live, but they usually get to keep the funds in the event of your death.
There are other types of annuity investments including but not limited to equity indexed annuity, tax deferred annuity, CD annuity and there are many others. If you are deciding to make the step of taking out an annuity, make sure to consult with a professional so you choose the right investment type for your life.
Contributing National Payday Staff Writer
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