There are many types of
annuities, but the Bond Market Foundation condenses this list to
two varieties. Annuities are either variable or fixed rate.
Either of these, in turn, can be single or flexible premium and
immediate or deferred.
Variable rate and fixed rate
annuities refer to how the annuity is invested. Variable rate
annuities are usually invested in mutual funds or stocks. The
advantage is that as the stocks or mutual funds increase in
value, the annuity amount also increases accordingly. This can
increase the original value of the amount placed into the
annuity, increasing payment benefits. However, if the stock
market falls, the original amount placed in may become less,
resulting in lower than anticipated payments. This vehicle is
good for people who don’t need their money for ten to fifteen
years, to bypass stock market fluctuations. Fixed rate
annuities, on the other hand, are invested in bonds or other
fixed rate investments. The advantage with these is that the
principle amount is safe, however it doesn’t have the growth
potential that the variable rate annuities offer. This type of
annuity is good for those who need their money soon or don’t
like taking risks.
Annuities are another
retirement planning vehicle. This article will discuss the
various types, plus the pros and cons of annuity investment.
When purchasing annuities,
you can pay in one single lump sum or pay with flexible
payments. The flexible plan allows one to make smaller payments
over time to reach the financial total that they desire, while a
single annuity is a lump sum payment that may be used by
someone, gaining an inheritance or settlement of some sort.
Immediate annuities are
annuities that start making payments to you, on a monthly,
quarterly or annual basis, as soon as a lump payment is made.
Immediate annuities can be paid out for a defined number of
years or for your lifetime, depending on what you choose. The
shorter payout period results in higher payments to you, but
doesn’t provide lifetime income, while the lifetime guarantee
variety makes smaller payments to you, ensuring income for as
long as you live. A deferred annuity on the other hand, allows
the money you invest, to grow tax free until needed by you, for
retirement. The annuity can start making payments as soon as the
investor reaches fifty-nine and a half years of age. The income
growth during this time is tax free, until the annuity contract
is exercised. Immediate annuities, on the other hand, have no
tax-free growth advantage.
Annuities aren’t for
everybody. Generally they are good for people who have maximized
their retirement contributions. As opposed to retirement
contributions, annuity contributions are not tax deductible.
So it behooves the individual to only use any surplus amount
left over from retirement investment vehicles, for annuities.
Also annuities aren’t liquid like other investments. Annuities
are good for people who don’t need the money being placed into
these investment vehicles until retirement. If money were
needed, the insurance company may impose fines and penalties for
withdrawals . Finally annuities make sense for individuals, near
retirement age, who get a lump sum of money near retirement and
want a lifetime guarantee of income.
Remember that insurance
companies are in this to make money. Every insurance company
will charge annual fees, management fees and a sales commission
to the person who sold you the policy. Also, make sure that the
insurance company used is financially well off and solvent. If
it runs into financial trouble, it may not be able to guarantee
payments to you when the annuity contract is exercised.
Regardless of this, annuities
are a secondary way to increase and guarantee lifetime income,
after retirement plans, and deserves consideration for any
portfolio.
