An annuity is an insurance policy in which the money you pay into it is invested by the insurance company, and the income made from it is paid to you in parts over a certain period of time. The great thing about an annuity is that it provides you with lifetime income, offers better tax savings, combines insurance and savings, guarantees returns, and offers inflation protection. However, as its drawbacks, it also does not maximize your investment, it proves to be inflexible, and it requires a large sum of money to invest.
Is an annuity a wise investment for you? Many insurance companies offer annuities as a great retirement investment, but it can be tough to know whether or not it is the right option for you. Here is some background information on annuities that will help you understand its nature, benefits, and disadvantages so you can make better decisions:
Annuity is an insurance contract you pay either in a lump sum or though periodic payments over time. The amount you give is invested by the insurance company or financial institution. Income generated is paid out to you in parts, usually over your lifetime or a specific period of time. There are two basic types of annuities:
*Immediate annuities–Immediate annuities are those you pay in a lump sum and you immediately start receiving your returns the next year. This type of annuity is great for those who have just retired who have a large sum of money and want to quickly start getting money they may need. The thing about this type of annuity is that it is more expensive than the next type.
*Deferred annuities–Deferred annuities are more common. This type of annuity is either paid in a lump sum or in installments with your returns given out after a stipulated period of time, such as ten years. Payouts may also be given in a lump sum, through payments over a certain period of time, or through lifetime payments after you have retired. The principal money you have invested here grows tax-free until you decide to withdraw it.
Annuities are also classified according to investment styles, namely fixed and variable annuities. Fixed annuities are characterized by a guaranteed and fixed rate of return on investments, which is good for investors who want to play safe. Fixed annuities can either be immediate or deferred. Variable annuities, on the other hand, are those whose returns vary depending on the performance of the mutual funds selected at the beginning of the contract that invests money.
Benefits of annuity
Aside from the efficient way to canvass and choose the best annuity from among insurance companies and other financial institutions because of annuity leads (LINK)generation, annuities are becoming increasingly attractive to many investors, especially those who are retiring within ten years. Here are the benefits that annuities provide its holders:
*Provides you with lifetime income– Annuities can provide you with guaranteed lifetime income. Upon retiring, you can begin receiving income from your principal investment. You will annually receive returns, either fixed or variable, depending on the investment type of annuity chosen upon the initiation of the contract.
*Offers better tax savings. Since your investment can grow tax-free, annuities feature better tax savings compared to other investments. You have to note though, that if you decide to pre-terminate your principal amount, you will pay penalties and other applicable taxes.
*Combines insurance and savings–Annuities are often used as an investment tool that you can enjoy while you are living out your retirement years. It is actually an insurance policy for the simple fact that you are insured to receive benefits in your lifetime. But it is also an investment for the reason that you will be enjoying throughout the remainder of your lifetime the income of the investment you placed with the insurance company or financial institution.
*Guarantees returns–Unlike other available investments that present the possibility of losing your principal amount, annuities can provide you with guaranteed returns. Especially when you choose fixed annuities, you are sure how much you will receive periodically. Even with variable annuities, you can also be sure that at least the principal amount is guaranteed.
*Offers inflation protection.–Annuities can also be set in such a way that the income you periodically receive can sustain the cost of living, but for a higher initial cost.
Drawbacks of annuities
Despite the attractive benefits of annuities, they still hold some disadvantages and limitations that disappoint some investors. Here are the drawbacks of investing in annuities:
*Does not maximize your investment–Although annuities, especially fixed annuities, can ensure return on your investment, it does not maximize your investment. It cannot take advantage of other possible greater earnings that you can obtain in other investments, such as stocks, Forex trading, and T-bills.
*Proves to be inflexible–Since the principal amount you paid is held by your insurance company for investment, you cannot get that amount of money anytime you want for another investment or purpose. The long term contract in annuities can cause you probable opportunity losses. Although you can pre-terminate the contract, you will be at a loss with the penalties, applicable charges, and taxes.
*Requires large sums of money to invest–Even though you are fine with the minimal returns and the long-term aspects of annuities, another drawback you might find disappointing about annuities is its capital investment requirement. Annuities are quite expensive to invest in, especially when you decide to invest at an older age. The younger you are, the cheaper your principal premium is, but you may have to wait for a certain retirement age or whatever term the contract states, so you can start receiving your returns.
The decision of whether or not an annuity is a wise investment for you is yours to make. Everyone has different needs, and you need to weigh your priorities. If you have the money and you want to play safe, as well as enjoy the income at the time you need it most, then annuities are for you. On the contrary, if you want to maximize your investment and you want to have better control over it, then there are other investment options for you. As long as you know the different opportunities the financial world offers and you know the different advantages and drawbacks they present, you can always make better decisions.