An annuity account is a special investment plan that allows you to collect your money just when you are retiring. Annuities involve different parties and come in different types. Just like other investment plans, they also have their share of advantages and disadvantages.
If you are planning for your retirement or saving up for medium- to long-term plans, an annuity account may be the right investment move to make. It is very important, though, that you learn more about annuities to better understand the product and to help you make better decisions. Here is some basic information you should know about annuities:
What is an annuity account
An annuity account is an investment contract between you and the investment company, usually an insurance company, wherein the latter periodically pays the annuitant a certain sum of money starting at a particular period in time and for a specified span of time. Agents usually reach you through Annuity Leads. In this type of investment, you place your funds with the investment company, either in a lump sum or on an installment basis, as soon as you sign your contract. You will then receive your payments starting on the stipulated date for a number of years or perpetually. If you are planning for retirement, an annuity account may be beneficial for you.
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 supplies the funds to be invested with the insurance company. The annuitant is the recipient of the returns, while the beneficiary receives the returns in case the annuitant passes away during the course of the contract or depending on the stipulation of the contract. In most cases, the owner-payor is also the annuitant.
Types of Annuities
There are different types of annuities. There are immediate and deferred annuities, fixed and variable annuities, fixed period and lifetime annuities, and two-life annuities.
*Immediate and deferred. 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. With deferred annuities, you may pay the investment amount in a lump sum or on an installment basis and start receiving returns after a stipulated number of years. The number of years in between the payment and returns is called the accumulation period.
*Fixed and variable. Annuities may also fixed or variable. Fixed annuities are those accounts where you receive fixed amount of returns every year during the stipulated period. Variable annuities, on the other hand, are those with returns that fluctuate depending on the performance of the investment vehicle.
*Fixed period and lifetime. Your annuity account can also be for a fixed period or a lifetime. 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. This contract means a fixed period of payment for twenty years. If the unfortunate happens before the term ends, your beneficiaries will receive the specified amount until the contract ends. Alternatively, you may choose a lifetime annuity in which you receive annual returns perpetually starting on the stipulated payment date. If you pass away during the repayment period, your beneficiaries will not receive the specified amount.
*Two-life annuity. There is also what is called a two-life annuity wherein a spouse continues to receive the specified amount after the annuitant dies. This payment goes on until the spouse also passes away.
Advantages of Annuities
One of the great things about an annuity is that it provides continuous income for those who are planning for retirement and for those who have medium- to long-term plans. Taxes are also deferred with annuities, unlike other investments. You start paying taxes only when you start receiving your returns. Finally, annuities make wise investments since they combine both savings and insurance. You get to save money for future use while also being insured in case of death.
Disadvantages of Annuities
While annuities offer attractive benefits, they also have some drawbacks you might want to consider. First of all, annuities do not maximize your investment, especially if you choose fixed annuities. 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.
All investments have their benefits and drawbacks. The wisest way to choose an investment is to look at your needs and understand the risks that are present. If you think your needs are long-term and if you want sure returns, then an annuity account may be the best choice for you.