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.
An individual funding annuity is an Annuitization period. Annuity payment receives at the end of the contract.
This whole period is known as Annuitization Phase. Here, one needs to consider the income tax treatment once the balance increases. According to income tax rates and provisions by institutions the disbursement occurs.
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
Insurance companies issue the fixed annuities. 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.
Deferred annuities do not have payments begin right away. They pay you higher rates than Bank CDs. There is fix rate of interest and initial investment as per the 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 investors who have experience and are able to take 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 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.