Annuity is a type of insurance investment that guarantees a periodic amount of payment for a guaranteed period of time. It can benefit you in several ways, comes in different type that are computed using different factors, and is taxed in different ways.
Annuity has become a popular insurance investment choice for many middle-aged people. Understanding investment terms, including annuity, can be very confusing, but should not hinder you from making the best choices for your future. Here is a simple overview of annuity and how it works:
Annuity explained
Annuity is a type of insurance investment in which you, as the insured investor, receive periodic payment returns starting in a guaranteed year. You will usually receive your annual returns throughout your lifetime or for a certain period of time. You can pay for the annuity in spot cash or in long-term, affordable cash payments.
How annuity benefits you
Annuity can benefit you in many ways. First, it can be a great source of funds when you are planning for your retirement. Most annuities start paying out at the age of 60, just in time for your retirement. Even if you have no more job, you will still receive periodic amounts from your annuity. You can also use this type of investment to answer your long-term goals, such as a college fund for your child who is currently five years old. With annuities, taxes are deferred. This is because your investment earnings will be taxed only when the returns are paid out. Finally, annuities can be very accommodating. An insurance agent who may have read your information and conditions through Annuity Leads can match your goals with a particular type of annuity an investment company offers.
Types of Annuity
There are different types of annuities based on your premium payment terms, your annual earnings, the term of your returns payment, and other annuity variations.
*Based on premium payment terms. When it comes to paying your premiums, annuities can either be single premium or flexible premium. With single premium annuity, you pay for your annuity in one single payment which is more commonly known as a lump sum. On the other hand, flexible premium annuity allows you to pay for the annuity in smaller amounts paid regularly over a certain period of time.
* Based on your annual earnings. Annuities can also be either fixed or variable. Fixed annuities are those that guarantee a fixed amount of annual returns, comprising your principal and interest. These annuities are usually invested in government securities or other conservative types of investments. Alternately, variable annuities are those which are invested in more flexible investments, such as mutual funds. With variable annuities, payments made to you are variable, not guaranteed, and depend on the earnings your annuity makes.
*Based on the term of your returns payment. With regards to the payment of your returns, you can either opt for term annuity or life annuity. Term annuity guarantees you regular payments for a certain period of time. In most term annuity policies, if you pass away during your payment period, your beneficiary is entitled to receive the remaining returns. With life annuity, you are guaranteed payment throughout your lifetime, but payment shall be stopped and no refund shall be given when you pass away.
*Other variations. Joint annuity is another type of annuity fit for married couples. It is structured in a way that if one you passes, the surviving spouse continually receives the regular payment returns. Term certain is also another type of annuity that combines both term annuity and fixed annuity, where you receive fixed return payments for a fixed period of time.
Factors affecting annuity payments
Four major factors that contribute to the amount of payment returns you get include your principal, your interest earnings, demographics, and the term of payment. The higher the amount of your principal and your interest earnings, the higher the payment returns. Demographics also play an important role. For example, if you live in a state where life expectancy is higher, you may receive a smaller amount of periodic returns, especially with life annuities. Finally, if the period of payment is longer, you may receive smaller annuity payments compared to shorter or term annuities.
How you pay applicable taxes
Annuities are not exempt from taxes, but the great thing is that they are deferred. You only start paying for these taxes when returns are paid out to you. There are prescribed, as well as non-prescribed annuities. Prescribed annuities are those that allow for payment of taxes evenly all throughout the term of your policy, while non-prescribed annuities are those that allow for payment of taxes in a gradually decreasing manner until taxes reach zero.
When planning to make use of an annuity, make sure you decide which type suits your condition and your future needs best. Compare quotes from different insurance or investment companies in order to get the best value from your investment.
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