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Tuesday, July 17, 2012

Investment Option: Annuities Explained

Annuities may be one of the most puzzling ways to invest your cash if you do not have prior knowledge on what they are or even how they work. Because of their perceived complexity and confusing nature, annuity is one vital investment option which may elude many. Consequently, the next few paragraphs will give you an insight into this investment option.

How Annuities Work
In explaining how annuities work I would consider describing them first as an investment security into which you pay your money for a defined period of time, and when you reach a specific date you start receiving regular payments for a definite time period, often for the rest of your life. Most investors, above all those who are very risk hesitant, like annuities as they provide a steady flow of income. Moreover, different from bonds, mutual funds, stocks, and other ordinary investment opportunities, annuities are guaranteed.
The amount pay into the annuity and the period of payment will vary anywhere between a onetime lamp sum payment and several smaller payments over a very long time. This will still depending on the amount of annuity you intend to pay and the time you intend to begin receiving your payments. For instance, if you initiate annuity payments when you were 20 but don't plan on taking payments until retirement, you will probably make several small payments; however, if you were to begin paying in your late 50s, you will have to pay more monthly over a shorter duration. Annuities offer a pleasant supplement (and in some case, primary income) for those thinking their social security benefits might not be adequate during retirement.
When you reach this payment commencement date you will receive a guaranteed monthly payment amount until your death. Some annuities will also permit your spouse to receive some payments past your death until their death, but terms differ depending on where you buy your annuity.
Normally the issuer bases the amount and number of payments you get on the typical lifespan of someone in your position. If you live beyond than this average lifespan then you will continue getting your payments above the annuity's worth; on the other hand, if you die earlier you will the total money you receive will be less.
You may even marvel why the issuer would give you an opportunity to earn beyond what you paid them. However, even if you live longer, wholly the middling lifespan of the typical holder will remain true and they will possibly break even. The issuer also receives large from fees charged and investment made by your money for a higher return rate.
Forms of Annuity
There are lots of different annuity types available and they will mostly be accustomed to suit the buyer; however, the two familiar types of annuities are deferred and immediate annuities.
Immediate annuities, you pay a lump sum amount to the issuer and then they will provide you payments on a monthly basis with a specified return rate.
Deferred annuities are the ones common for the usual investor. It is where you pay into over a given duration and then receive annuity payments every month upon reaching the set time or amount.
Types of Annuity Payments
The two usual payment types are fixed and variable annuities. A fixed annuity gives a guaranteed return rate over a specified duration. Fixed rate annuities are beneficial to risk hesitant investors and/or those approaching retirement and not wanting to lose their nest egg.
A variable rate annuity is for investors who expect higher return rates on their savings and would if not invest in a mutual fund or something alike. They guarantee a lower return rate, but are often attached to another security (usually mutual funds) that offer higher return rate when the market allows it. The benefit being that, in a booming market, your money yields more.
Benefits and drawbacks of Annuities
There are remarkable tax benefits for annuity investors. Particularly, your investment in annuity grows tax-deferred until you begin withdrawing it. Only the profits made on your investment are taxed, and given most people have lower income in their retirement, the tax will be at a much inferior rate than would be during their working lifetime. Compared to IRAs and 401Ks, there is your contribution to annuity is unlimited.
Another apparent benefit of annuity is the guaranteed payments compared to stocks where losses are made with financial shake ups.
Some of the drawbacks of annuities are that the early withdrawal penalties if forced to imarturely cash in your annuity.
Another drawback of annuities is the higher fees compared to other investments. Some annuities will charge up to 2-3 percent or more.
Where to Buy Annuities
There are hundreds, if not thousands of companies selling annuities. Usually any insurance company will sell some form of annuity.
It is utterly important to do some study on the company selling you the annuity. Since you depend on them to supply you with income for the rest of your life, you should be sure it can last that long. Fortunately, the companies that offer investment plans like annuities are rated by the likes of Standard and Moodys and so you can observe any changes in their rank. Your state's insurance docket will also watch these companies and avert any potential problems before they occur.
With this I would consider that you have got most, if not all your puzzles on annuities explained

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