What is an annuity? Definition of a Fixed, Variable Annuity
61What is annuity?
Annuity is a form of investment. In annuity you put payments for a particular time period and pay one big amount of money in a contract. When you make annuity you get some payment at regular intervals in return. Annuities can be obtained from insurance companies. The contribution made by you is then invested in certain sub-accounts and it usually consists of bonds and stocks. These bonds and stocks generate income for you and sometimes for the insurance company as well, depending on the agreement in the contract.
Annuities are largely used for retirement. There can also be penalties if you withdraw the cash from your own annuity before a particular age. Annuities usually contain a payout which is not moderated with any change in the market. Therefore, annuity is adopted largely by many people. It provides security and stability.
Types of annuity
There are mainly two types of annuity which are:
1. Variable annuity
2. Fixed annuity
Fixed annuity
Fixed annuity provides a guaranteed payout. Fixed annuity is very stable and secure therefore, it pays a marginally less rate of return.
Variable annuity
Variable annuity offers a great rate of return in comparison to fixed annuity but these are taken as less yielding investment. It allows the customers to increase their return payments because the return rate is not constant and it varies. The customers are requested to be very conscious while using variable annuity because it does not offer the same stability and security as fixed annuities.
Hybrid annuity is another type which is an amalgamation of fixed and variable annuity. There are certain annuities which guarantee you to withdraw a particular amount of your initial account value when you live. It also offers a higher rate of return. In immediate annuity, the customers receive a high amount in exchange of receiving instant payout which will last lifelong. In this type of annuity the amount of payouts depend on many factors and mainly age. More your age and higher amount of payouts you can receive.
Disadvantages of annuity
Annuity has many drawbacks and fee is one of the disadvantages of investing in an annuity. It offers a return of payment on your accounts but at the same time it demands high fees. The annuity is very complex. Many people are often confused whether or not it has full guarantee of payout or not. This can result in some serious troubles for people who are making use of annuities as retired plans. It also puts the person in worry about his money’s worth. Though annuities offer guaranteed high payouts for life time but if a person dies soon after receiving annuity then he no longer will get the payout and neither does his family.
To invest in annuity, you have to consider it plus points and minus points. You have to make sure your needs and also see if annuity is a good option for you or no. It is best if you consult any financial advisor to tell you if you should buy annuity or no?
