Annuities In Layman Terms
What exactly is an annuity? An annuity is a contract between you and a life insurance company where you provide a lump sum of money to invest, most often for retirement. One huge benefit of annuities is they can offer a guaranteed monthly income for the rest of your life.
It is important to know there are different types of annuities. An immediate annuity pays you a fixed sum of money right away. A deferred annuity is a good option for young people because the money will continue to grow tax free until payments are received.
Another important factor to consider regarding annuities is whether to choose a fixed annuity or a variable annuity. A fixed annuity may lock you into a fixed rate for the life of the annuity. Other fixed annuities may lock you into one rate for the first year, and then the rate may change year to year. The payout of the fixed annuity is actually the interest that is earned. One great feature of fixed annuities is the principal is guaranteed.
Variable annuities do not pay out any interest. With this type of annuity your money is invested in mutual funds. It is possible you could earn a profit, however you could lose money.
Index annuities tie the interest earned each year to the performance of the S&P 500 Index. This type guarantees you will not lose your principal, like fixed annuities. Additionally index annuities give you the profit potential of variable annuities.
There are three ways to withdraw money from an annuity at the end of the term. You can withdraw all of it in one lump sum, or choose to withdraw some of it. Another option is to take payment monthly.
Annuities are an excellent retirement investment option. With all the choices available it is vital to do your homework, and consult with a trusted financial adviser to help you choose the best option for your own circumstances.
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