Annuities – An insurance product used as retirement income and can give tax benefits. Generally payment is made to the insurance company and the insurance company makes payments on a regular basis depending on the terms and conditions of your annuity. Unlike Life Insurance, Annuities work on the payment of larger amount by the investor, which is paid back by the insurance in small amounts. The period of annuity can be 25years or an undefined period of lifetime.
There Are Few Major Steps Followed In The Working Of Annuities:
* The initial investment of money by the investor in a larger amount is called “funding the annuity”. The funding must come to end before the commencement of the next step of annuity.
* The annuities are purchased from insurance companies who thereby invest the money to get better profits. Generally these companies gain larger money than they give out to the annuity holders. This step can be termed as the “Capital Management”.
* Then comes the “Distribution Phase” when the annuity is paid out to the investor over the specific time period…Some annuities stop their payments with the death of the investor, and the investment gets terminated. Whereas the others would continue paying out over the annuity’s life and a spouse’s life. The spouse continues to receive the payment even after the death of the annuity. Upon the death of the spouse all payments stop.
* The Annuities often come with strict rules and regulations on the funds invested.
Before the purchase of the annuity you should decide when you would want to receive your payments. If you have a spouse you must rethink on the issue.
There are three basic annuity potions for you:
* Fixed Annuity: With the fixed annuity the payment made to the insurance company is put under a fixed account which is not subject to change under any conditions. This type of annuity is great when the economy is rough.
* Variable Annuity: Under this account your receiving of the amount keeps changing depending on the economy. If the market is low your returns can be low and vice versa.
* Index or Equity- Indexed Annuities: This has mixed features of Fixed and Variable annuities. In this type your principal amount remains saved while the equity market might experience the losses.
The two important reasons to use annuity as an investment vehicle:
* Your money will be saved for a long term
* You can get a guaranteed stream of income for a certain period of time.
To talk about one negative aspect of investing your money in annuities is that you cannot withdraw your money during the growth period, without incurring loss or penalty. This explains well why the annuities can serve so well the retirement needs. The fund most often required by the depositor is well after 59 years. Therefore it can be said that the working of the annuities suffice the needs of the investors to the best.
Robert C Eldridge Jr