Annuities

Overview

Investments made over a period of time for recouping it during a later phase of life can be defined as annuities. Frequently misconstrued as "insurance" policies for the rich, annuities provide guaranteed income for the annuitant either for life or for a pre-defined period.

Many life insurance policies and pension plans are essentially annuities. There are two types of annuities: fixed and variable. Fixed annuity refers to an insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract. In case of variable annuity, you can choose from a range of investment options, but the periodic returns will depend on the performance of these investment options.

How It Works

Before buying an annuity plan, you should evaluate it like any other investment plan and base it on these four criteria: safety, profitability, liquidity, and availability of your invested capital in cases of unforeseen requirements.

After choosing a specific annuity plan, you make payments (usually monthly) to the financial institution or the insurance company. You stop these payments after a predetermined time and start receiving a sum of money that has been mutually agreed upon by you and your financial institution. This amount is called the "payout," which is generally reimbursed to you as monthly installments.

You can pay on an annuity for decades and disburse thousands of dollars into the fund. When you start receiving the payout, you can receive $1000 or much more per month. The amount you pay and receive depends on the terms of your annuity.

For example, if you had paid $10,000 into the annuity and your payout is $500 per month, after 20 months you would've been refunded with the money you initially paid. However, the payout would still continue for a fixed number of years or for your lifetime (life annuity). As a result, not only have you just been refunded with your initial capital but also earned on your investment. Annuities may have a death benefit clause in case you die before you receive payouts or before you've recouped your investment. In that case, the insurance company will pay your beneficiary a guaranteed minimum amount, such as your total purchase payments.

Benefits

Annuities can be very profitable. Often in long-term annuities, you can recoup your investment for much more than what you had paid, thus giving you a lucrative return on your invested capital. If you start an early annuity and pay on it longer, the amount you forfeit would be small, causing you no financial strain, but it will pay off handsomely when you start receiving payouts. Annuities offer tax-deferred growth of earnings.

Cost/Pricing

Earlier, annuities were traditionally expensive, which explains the assumption that they were insurance policies for wealthy people. But low-cost annuities are available today including whole life insurance policies, which can be paid in comfortable monthly installments. The payouts on these accounts are much lower than traditional annuities. However, these serve as cost-effective schemes for retirement planners, who have little cash to invest.

Timing

The earlier you start an annuity, the more money you'll have invested and the bigger your payouts will be. When you start an annuity, the interest rate, which can either be variable or fixed, coupled with the number of years you'll make payments are the main factors that will determine the payout amount that you will receive.

It is also possible to invest the money from your 401k into an annuity if you believe you're going to outlive the amount you've saved in that account for retirement. This allows you to draw a monthly payment for the rest of your life, without running a risk of exhausting your retirement funds.

Companies/Industries

Annuities are available through brokers and insurance agents. There are many companies that offer annuities and they should be thoroughly researched before deciding to invest. You want to find the companies with brokers and agents that will provide the most beneficial annuity. Agents Sales Journal produced a list of the top companies with the most effective annuity sales and marketing material and Prudential Annuities was placed as the number one company. Allianz Life Insurance Company of North America took the second spot and Midland National came in third.