Why do many consumers run from the talk of finance and investments? LifeQuotes will break down for you the different types of annuities, an investment option sold by insurance companies. In a nut shell, annuities offer income for the rest of your life.
Annuities can be unpredictable simply because we are taking a guess on our life expectancy. An annuity can supplement your 401k or Social Security benefits. The basis for an annuity is simply generating income and an accumulated amount which is to be liquidated over a period of years.
According to McGill Life Insurance, 8th edition, the term annuity is derived from the Latin word annus, meaning year, and defines an annual payment. The income paid out may be received annually, semiannually, quarterly and monthly. It depends on the agreement and most choose a monthly payment.
There are four major categories of annuities:
- Fixed – Interest payments, or your rate of return, are fixed for the duration of the contract
- Immediate – Start receiving dividend payments upon signing the contract
- Variable – Market fluctuations will reflect in your payment amounts, but you will never lose the original amount you invested
- Deferred – Payments delayed to begin after the reserve reaches a certain profitability or you reach a certain age
Annuity. org, an organization dedicated to promoting financial literacy, explains fixed annuities are the simplest type of annuity. In a fixed annuity, you invest a sum of money into a contract. The insurance company chooses where to invest and then sets a fixed rate of return, based on their anticipated gains from the investment.
Since the rate of return is a set percentage, you never have to worry about losing money in the stock market. Market fluctuations are not factored into the payout amounts. Your payments are fixed and will never change and are designed and guaranteed to last the rest of your life.
You can either receive payments immediately, or set up a payment schedule. Another annuity option is to hold off on receiving payments until you reach a certain age.
If there are any funds left over after you do pass away, the money can be awarded to a beneficary, if the product extends that option. Not all annuities award the reserve left after an annuitant passes away.
The National Association of Insurance Commissioners (NAIC), a standard-setting regulatory organization and classifies annuities as a financial product, although they are sold by life insurers. The NAIC has said that any seller of annuities present the customer with a prospectus before the annuity is in force.
A prospectus is an illustration that shows an annual anticipated rate of return on the original sum invested. The prospectus states the areas of the market in which your money will be invested. It will lay out a payment schedule set to last the rest of your life. Payment s and lays out a payment schedule designed to liquidate your annuity reserve with set payment amounts you receive annually. It projects how much payments to you annually could be based on the
Your payment schedule, that you selected, is illustrated so you can clearly see the payments are rationed out of the projected reserve amount of your mature annuity. When you die, if there is any money left in your annuity’s reserve, the prospectus will also explain how a death benefit would be transacted.
Some annuities are set up to continue payments to a beneficiary you select. And the prospectus will state how the death benefit will be paid out to your beneficiary. Whether in lump sum or a rationed payment schedule.