Annuities are one of the more confusing investment options available. Most investors have heard the term annuity but aren't sure what they are and how they work let alone the pros and cons of annuities. In this article I hope to explain some of the benefits and downsides to help you decide whether annuities are right for your investment portfolio.
So what exactly are annuities? Well if I were to boil it up, annuities are a contract between you and the issuing company that results from you paying them money (either all at once or over time) which results them making payments to you either for a set period of time or for the rest of your life. Let me try to get in to a little more detail to help explain a little better.
The typical type of annuity is known as a fixed annuity. The way fixed annuities tend to work is that you make regular payments to the issuing company (commonly an insurance company). Once you reach a certain amount of money the annuity matures and you begin receiving payments back for the amount you paid in, plus some set rate of return. For example lets say you paid $100 a month to the annuity until it reached $20,000. Once you reach that $20,000 (and you meet all contract criteria like age requirements) you start receiving equal payments each month which is taken from that $20,000.
Annuity Payment
The number of payments you receive is set in the contract that you sign. Some annuity contracts pay you for a set number of years, and others will pay you until you die. If you live longer than the average person that the payment amounts are based on then the company will lose money and you will continue to receive payments, even beyond the $20,000 you contributed.
Annuity Products
The major advantage of annuities is that the amount you earn with your annuity contract is tax deferred, meaning as it grows you don't have to pay taxes on it until you take the money out. Once you begin receiving annuity payments you will then be taxed, but typically this will be at a lower rate assuming you start receiving payments at retirement.
Annuity
Fixed annuities don't pay a huge return typically, but there are variable annuity options that work similarly to a mutual fund and are tied to some investment securities like the major indexes or a particular sector. These variable annuities can be risky, but many come with a guaranteed floor amount that will pay you a smaller annuity return.
Annuity Income
Ultimately annuities are an interesting way to save money for your retirement but they aren't for everyone. Before investing in annuities be sure to consult your financial planner to understand all the risks and benefits that annuities have to offer.
Annuity Cash
Annuities can be a great investment tool when planning your retirement but you need to be sure you understand all the terms and conditions of annuities before you invest your money. For this and other information visit Annuities Explained to have your annuity questions answered today.
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