An annuity relates to a contract between an individual and a life insurance company; however, a charity or trust can stand in place of the insurance company. In the most basic definition, an annuity is the agreement for one person or organization to pay another a series of payments. There are several different categories of annuities based... Read more
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To put it simply, annuity is when an individual signs a contract with their insurance company. This contracts states that the individual will make a lump sum or series of payments to the insurance company. I know that sounds like what you always do for your insurance company, right? However, with an annuity the insurance company will make payments back to you beginning either immediately or at a future date. An annuity usually offers growth of earnings and tax deferred status, as well as the possibility of a death benefit that will pay a certain amount to a beneficiary upon your death. Essentially any money you pay in to an annuity will be paid back to you plus any earnings of the initial payment in periodic payments monthly, quarterly, or annually. While there are many options and plans for an annuity, there are really only two basic types of annuity - Fixed Rate Annuity or Variable Rate Annuity. Pretty simple right? Well if it is not simple seeing it in those terms keep reading and it will become clear to you. A fixed annuity means that the insurance company guarantees a minimum rate of interest as your account grows and that the periodic payments are guaranteed to a certain amount per dollar in your account. Periodic payments may be for a set period of time such as 10 years or for an indefinite time frame such as your lifetime or the lifetime of your spouse. A variable annuity means that you can invest your purchase payments in different investment options. The return from the investments and your periodic payments will vary depending upon the performance of the investments. This can be a good choice if your investments do well, however if the performance of the investments drop then so will your periodic payment. Variable annuities are regulated by the SEC and are considered securities. Fixed annuities are not considered securities and are not regulated by the SEC. Before purchasing an annuity, be sure to discuss all of the options with your insurance company to make sure that you are making choices that will provide you with a viable lifetime income to help you once you reach retirement age. Retirement planning is important, understanding what you options are for retirement is even more important. You should review the complete plan, considering such factors as the guaranteed interest rate, the surrender charges, and the administrative and maintenance fees. A high interest rate during the first year is not always the better choice. This is especially true if the interest rates drop to a low minimum rate the next year with high surrender charges and additional fees.
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