Annuities Explained

An annuity is an contract made between a person and an insurance company, that will help provide a regular income in exchange of a lump-sum pay or the investments made over a period of time to the insurance company. If you are thinking of investing your money to make your retirement safe and secure financially, then annuity is the best retirement product. The annuities explained in this article will help you make a better choice for safeguarding your future.

Annuity Definition
Many insurance companies define annuity as an investment type that will guarantee payments of specific amounts at specific time intervals. This amount can be received as an periodic interest or a lump-sum payment. Know more about the different types of investments and about how does an annuity work.

There are two types of annuities: fixed annuities and variable annuities. Read on to understand fixed and variable annuities explained below, to make understanding annuity and its types easier for you.

Fixed Annuities Explained
A fixed annuity is the established payment that is announced by the company, on an annual basis. The principal is guaranteed by the company and it can never decline. Interest is added to your deposits every year, by the insurance company. The annuity is specific to the term selected. Longer the term, higher the interest to be paid. The interest is tax deferred, till it is not withdrawn from the account. Only 10% of the balance can be withdrawn annually. Surrender charges or withdrawal penalties are to be paid if there is more than 10% withdrawals in a year. Many companies offer an initial one year rate, that changes each year. Other options available with a few companies, are the multi-year guarantee annuities, that have a locked-in rate for the entire period.

Variable Annuities explained
In variable annuity, you do not receive interest from the company, but it is invested in mutual funds. This may help you earn more money or lose more on principle, depending on the mutual fund selected by you. The best option over fixed and variable annuity is the index annuity. Know more about the pros and cons of variable annuity.

Equity Indexed Annuities Explained
Equity indexed annuity pays an interest rate according to the performance of a common or well known index, like the SP500. The annuity growth is based on the participation rate of the index or the stock market it is tied to. In this way, you never lose your principal. This helps guarantee you with a fixed annuity, that has a potential of earning a profit like a variable annuity.

Life insurance annuities come in different types, like immediate annuities and deferred annuities. Life annuities suited for a retried person are the immediate annuities. The immediate annuities provide them with a steady stream of income, that is reliable. If a younger person is choosing an life insurance annuity, then he should obviously opt for the deferred annuity. This is the most common choice, as the money is tax-free, till it is not withdrawn. If you are thinking about retirement, you need to know more on retirement planning.

When choosing an annuity, take care to understand the fees related to it. There are generally annual charges to be paid. You also should know all about the heavy surrender charges that are put, when withdrawing money within a certain period after opening. You should make sure that you opt for a guarantee to be added on to the annuity, for a period of 5 to 10 years. This because, god forbid, if you die the day you receive the annuity, after handing over your hard earned pension, your estate suffers a hefty loss and the insurance company comes earns a large profit! So to ensure that your family at least earns the annuity, you should opt for a guarantee. Keep your personal situation in mind and keep your choices open. Compare all the features of annuity offered by different companies, before choosing the one that suits your requirements. One cannot predict the future and the market index, thus make sure you are through with your present and secured with your future, from any unforeseen calamity.