Everyone is willing to plan for the future and have their retirement plan so that they can live on their own terms even if they are retired. An Annuity is also a kind of investment that will give one regular return in a future period. Before retirement one can accumulate the funds and can get the regular return at any specified future date. Here is FinanceShed with a complete understanding of What is Annuity and what are Types of Annuity.
What is an Annuity?
An annuity is a financial product that pays a fixed amount of payment to an individual at a stated period of time. This source of income is a primary income stream for retirees. One can deposit as much amount as one afford in this account and can expect a stream of payments at a later point in time. The period of time when the annuity is funded by an individual is called the Accumulation Time and at the end of this contract, annuity payment is received.
The whole period of the contract is referred to as Annuitization Phase. Here, one needs to consider the income tax treatment as once the balance increases, the disbursement is done by institutions that are subject to income tax rates and provisions. Also, contributions to these are the Best Annuities that do not reduce the taxable income thus it is recommended to go for annuities only after maximizing your contributions to pretax retirement accounts.
Types of Annuity
Fixed annuities are generally issued by insurance companies and can be offered through banks, independent brokers, and insurance companies, and their value increases based on stated returns within the annuity contract. These fixed annuities pay guaranteed returns and they do not have payments begin right away and are therefore deferred annuities. They pay you higher rates than Bank CDs. In this type of annuities, initial investment and a rate of interest are fixed regardless of market fluctuations.
The returns of variable annuities are based on the movements taking place in the market. This kind of annuities provides irregular payments based on the performance of the underlying assets. Depending on the need for an annuity, Some Best Small-Cap Mutual Funds are geared towards different investments. This kind of annuity is best for those investors who are experienced and are able to go for some kind of market risk. Here, the investor has the choice of investing in whichever fund is most profitable and carries the appropriate amount of risk for his personal investment style.
Immediate annuities are more like an insurance policy. It is the most used and most commonly understood insurance policy and only involves paying a Lump-Sum Amount to an insurance company and in return receiving the right to immediately receive the periodic payments. That simply means that the annuitant begins receiving income immediately after making a single lump sum investment.
When in immediate annuity one gets the right to receiving payments immediately, the deferred annuity is the complete opposite of it. Generally, people have this type of annuity plan to have enough funds once they reach in their 80’s as deferred annuity accumulates money. But then, when the owner wants to start collecting the payment, he can always convert deferred annuity to immediate annuity.
All these annuities can be effective tools for different kinds of people based on their planning of the future but it important that you are investing in a correct annuity because of the rigid provisions.