An annuity is a sum of money, usually fixed, that is received by someone every year, usually paid on an annual basis and for the rest of the recipient’s life. The term annuity can also refer to a type of investment or insurance policy that returns to the investor—or policy holder continuing payments—on an annual basis, for the rest of their life. There are two basic types of annuity, those paid immediately and those paid on a delayed or deferred basis.
Immediate Annuities
For an annuity to be considered immediate, the person who will be the recipient pays one payment to an insurance company. For doing this, the insurance company guarantees a series of regular payments. Traditionally, these payments have been till the end of the person’s life. However, over the years, other possible payout time options have been devised.
Deferred Annuities
For an annuity to be considered deferred in nature, the person who will be the recipient pays, in a manner allowed to be tax efficient, for their retirement payments in the future. The payments accrue and grow in size until, at retirement they are converted to an immediate annuity.
Management of Annuities
Management of annuities is an important topic, because it relates to the costs the holder of the annuity pays out over time for watching the performance of the funds paid into the annuity. Basically, there are three ways that an annuity should be managed. These are as a fixed, variable, or indexed annuity.
Fixed Annuities
Annuities of this type are considered conservative types of financial product. These are the best type of annuity for people saving for their retirement.
Variable Annuities
This type of annuity is usually used as a way to save, sooner or later, on taxes to the government. This is not the type of annuity for most people to choose. The money paid in is at a higher risk than the funds placed in a fixed annuity.
Indexed Annuities
With this type, the value of the annuity can rise and fall based on the stock index to which the annuity is connected. As far as risk goes, the indexed annuity is considered to be between the fixed and variable types of annuity financial products.
Before any investment is made, the potential investor should investigate and learn about all three types of annuities. Each person is unique and so is the type of investment that would be best for them.
