What Are Annuities?
What are annuities, you may be asking. An annuity is a contract that is developed between an individual or a married couple and their insurance company. The annuity is a lump sum payment or a series of smaller payments made over a period of time. These payments made into the account have the goal of growing at a specific (or sometimes not specific) rate of return over a period of time. The insurer agrees to make periodic payments to you at some point in the future. Sometimes, these payments are made right away, others will have years before the income payments are withdrawn.
What are annuities? To further explain what annuities are, it is important to break down the various types. Annuities can be split into two groups: fixed annuities and variable annuities. With fixed annuities, the insurer promises to pay at a fixed rate. This minimum rate of interest helps the value of the funds in the annuity to grow. With a fixed rate annuity, the insurer is also guaranteeing that there will be a minimum amount to be paid out to you as the beneficiary when payments are made. These payments will last for an indefinite period (such as your lifetime) or they may have a very specific period of time listed (such as 20 years.)
The second type of annuity is the variable rate annuity. A higher risk option is to go with the variable. What are annuities with variable rates? These are the type of annuity that you can put funds into but the funds are used to purchase payments from a wide range of different investment options. Many are mutual fund sources. With this particular type of investment, the funds you put your money into also determine what the rate of repayment is. If the funds do well, this increases what is earned by the annuity. If the funds do poorly, this may decrease not only what is earned but also the principal payment associated with them.
For this reason, variable annuities are far more risky than those that are fixed. Those who plan to hold the annuity for a longer period of time are likely to do better with a variable rate (assuming they can afford to do so) and those with a lower risk tolerance or a need for guaranteed income may wish to go with a fixed rate annuity.
What are annuities besides investments? They are opportunities for the investor to earn an income in retirement. Individuals can start investing in these types of annuities from an early age to build up a sizable retirement account. Or, they may invest in them just before retirement or even in retirement with a lump sum investment. In any case, the funds will build up over time until the disbursements begin to happen. In some cases, the investment will have a death benefit which means that the funds may transfer to a beneficiary if the owner dies too soon. With a variety of options, it is important to ask the question “what are annuities” to each insurance company before investing.