What is an annuity. This is a fantastic question. Definition Annuity is a specified income payable at stated intervals. Almost 80 percent of investors whoobtain an annuity do so in order to earn a good return. Compared to other forms of savings, annuities offer guaranteed, lucrative returns. This is because annuities define an investment in the present that gives you a return of the same value in the future. They form a very useful vehicle of investment. Insurance providers who sell annuities sell them on the terms that you receive a guaranteed rate of return on the money that you have hoarded with them. This means even if you have not paid the full amount of the annuity, you earn the contracted rate of interest on the money you have deposited with the insurance provider. Also, if you have started withdrawing money from the annuity you keep earning the rate of interest on the money that remains with the insurance company.
Another definition annuity is a contract between you and an insurance company to pay you the value of the money you invest in their annuity. This can be paid back at specified intervals, spreading over a long time, even till death. While this insures a regular flow of income, the most important advantage of an annuity is the return it gives. You can opt for to receive a increased return from the annuity by selecting a variable or an equity-indexed annuity instead of a fixed one. The increased return is traded off with the risk element that comes with the annuity. To understand the risks and the guaranteed returns it is important to understand how the types of annuities are defined.
A “fixed annuity” ensures a fixed rate of return on your money. The rate may be Much less if compared to other types of annuities; however, this form of annuity is the safest. Even during the period of preserving the money for the annuity with the insurance provider, you generate the fixed rate of interest. Therefore, the amount of money that is with your insurance provider keeps growing at the fixed rate of interest mentioned in the annuity contract. Since annuities come with the tax-deferred feature you can pay back the tax for the money you invest in an annuity at a later date. This means you also earn the interest on the money that you would have paid to the government as taxes, if you had not purchased the annuity.
If you buy a variable annuity, you earn a variable rate of interest. The market forces decide the rate of interest on this annuity because the money you invest is tagged with a portfolio of investment at the market rate. Naturally, the risk in these annuities is at the maximum. Equity Indexed Annuity: In an equity-indexed annuity the returns are variable as the annuity is linked with the stock market but the insurance provider guarantees a limit beyond which your returns will never fall. Hence, these are more secure than variable annuities.