11 October 2009

5 Basic Things to Understand about Annuity Accounts

An annuity account will help you get money when retirement comes. An annuity may involve many different parties and come in different kinds. They have plenty of pros and cons.

An annuity helps you save for retirement. It is very important, though, that you learn more about annuities to better understand the product and to help you make better decisions. Here are certain basic details that you should know about annuities:

Knowing an annuity account

An annuity account is an investment contract between you and the investment company, generally it is an insurance company, wherein the latter periodically pays the annuitant a specific sum of money beginning at a particular period in time and for a specified span of time. Agents usually reach you through Annuity Leads. When it comes to this type of investment, your funds are placed with the investment organization, in a lump sum or in installments, as soon as your contract is signed. On the stated date, you will begin receiving benefits. An annuity count will likely be an integral part of your retirement plans.

The concerned parties

The parties involved in an annuity contract include the insurance company, the payor and owner of the contract, the annuitant, and the beneficiary. The insurance company is the one responsible for contracting the agreement and paying returns to the annuitant. The owner-payor provides all the funds that is to be invested with the insurance company. In case the annuitant passes away during the course of the contract or depending on the stipulation of the contract the beneficiary receives the return, otherwise the annuitant is the recipient of the returns. Generally, the owner-payer is also the annuitant.

Annuities and their types

There are various kinds of annuities. There are immediate and deferred annuities, fixed and variable annuities, fixed period and lifetime annuities, and two-life annuities.

*It can be deferred or it can be immediate. Annuities may be classified according to when the payouts are given. With immediate annuities, you pay the investment amount in a lump sum and start receiving returns the year after. The investment may be paid in a lump sum or installment, and the returns may come after a stated number of years with a deferred annuity. The accumulation period is the time period spanning the payment and the return time.

*Fixed and variable. Variable and fixed are the two types of annuity. You receive fixed amount of returns every year during the stipulated period in the case of fixed annuities. Variable annuities will have fluctuating returns.

*It can be for a fixed period or for life time. Your annuity account can be for a fixed period or a lifetime as well. With a fixed period annuity, you will receive your returns within a stipulated number of years. For example, you may prefer an annuity account that lets you receive a certain amount of money every year starting at age 60 and continuing through age 80. The 20-year fixed contract means that payments are fixed for that period of time. If you happen to pass before the end of the term, your beneficiaries will receive the payments until the end of the contract. A lifetime annuity allows you to receive perpetual returns on your investment. If your life ends during the repayment period, your beneficiaries will find themselves unable to attain the specified amount.

*Two-life annuity. A two life annuity allows a spouse to continue receiving the designated amount after the initial annuitant passes. Payments will continue until the spouse also dies.

Advantages of Annuities

Something great about an annuity is that it brings a constant salary for people who intend to retire and for people with medium to long term plans. Annuities can allow you to defer taxes. You don't pay taxes until you are getting returns. Due to the combination of savings and insurance, annuities can be very wise investments for you to make. You get to save money for future use while also being insured in case of death.

Annuities have its disadvantages

The are pros and cons to annuities. Annuities don't give you a very good return on investment. Unlike other investment vehicles, annuities offer fixed or limited returns, unless you opt for variable annuities. Annuities are also inflexible since you cannot obtain the money anytime you want. Should you decide to terminate the contract early, the amount you get could possibly be lower than what you invested and there are penalties, as well as taxes, to pay.

There are pros and cons to any investment. The wisest way to choose an investment is to look at your needs and understand the risks that are present. An annuity account may be the best for you if you think of long term needs and want sure returns.

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