Why do many consumers avoid discussions about finance and investments? LifeQuotes will explain the various types of annuities, which are investment options sold by insurance companies. Annuities, in a nutshell, provide income for the rest of your life.
Annuities can be unpredictable because we are speculating on our life expectancy. An annuity is a type of insurance that can supplement your 401k or Social Security benefits. An annuity’s basis is simply generating income and an accumulated amount that will be liquidated over a period of years.
The term annuity is derived from the Latin word annus, which means year, and defines an annual payment, according to McGill Life Insurance, 8th edition. The income can be paid out annually, semiannually, quarterly, or monthly. It depends on the agreement, but most people opt for a monthly payment.
There are four major categories of annuities:
- Fixed – For the duration of the contract, interest payments or your rate of return are fixed.
- Immediate – Begin receiving dividend payments as soon as you sign the contract.
- Variable – Market fluctuations will affect your payment amounts, but you will never lose the money you invested.
- Deferred – Payments are postponed until the reserve reaches a certain level of profitability or you reach a certain age.
Fixed annuities are the most basic type of annuity, according to Annuity.org, an organization dedicated to promoting financial literacy. In a fixed annuity, you invest a sum of money into a contract. The insurance company decides where to invest and then establishes a fixed rate of return based on the expected profits from the investment.
You never have to worry about losing money in the stock market because the rate of return is a fixed percentage. Market fluctuations are not taken into account when calculating payout amounts. Your payments are fixed and will never change, and they are designed to last the rest of your life.
You have the option of receiving payments immediately or setting up a payment schedule. Another option for an annuity is to defer payments until you reach a certain age.
If there are any funds left over after you die, the money can be awarded to a beneficiary if the product allows for that. Not all annuities pay out the reserve leftover after an annuitant dies.
Although annuities are sold by life insurers, the National Association of Insurance Commissioners (NAIC), a standard-setting regulatory organization, classifies them as a financial products. According to the NAIC, any seller of annuities must provide the customer with a prospectus before the annuity is in force.
A prospectus is an illustration that shows the expected annual rate of return on the initial investment. The prospectus specifies the market segments in which your funds will be invested. It will lay out a payment plan that will last the rest of your life. Payments and lays out a payment schedule designed to liquidate your annuity reserve with fixed payment amounts you receive each year. It calculates how much money you could receive each year based on the
Your chosen payment schedule is depicted so that you can see how the payments are rationed out of the projected reserve amount of your mature annuity. If there is any money left in your annuity’s reserve when you die, the prospectus will explain how a death benefit would be handled.
Some annuities are designed to make payments to a beneficiary of your choice indefinitely. In addition, the prospectus will explain how the death benefit will be distributed to your beneficiary. Whether in a lump sum or through a rationed payment schedule.