Annuities Explained

If you don’t understand what an annuity is, join the club; although putting your money into an annuity is a popular investment option these days, people still aren’t quite sure how the whole thing works.

Essentially, an annuity is an investment security. You regularly pay money into the annuity for a specified period of time, and once that period of time has finished, you then receive money from the annuity. Some annuities will only deliver payments for a specified period of time, but other annuities will issue payments for the rest of your life. Annuities are a pretty safe investment since they are steady sources of guaranteed income. Other popular investments such as bonds, stocks and mutual funds aren’t nearly as low-risk. Due to this factor, annuities have become the obvious choice for the risk-averse investor. Annuities are a great option for people who worry that they will not be able to survive on social security checks after they retire.

There are no set guidelines for things like how often you make a payment into an annuity or how much you pay at a time. Each annuity has its own specific guidelines. Some annuities may require you to make a large onetime payment; other annuities want small amounts deposited into them over a period of months or years. What your payment plan will look like has a lot to do with how much money the annuity is worth and when you want to start receiving payments from the annuity.

To illustrate, consider the following example: If you start paying money into an annuity when you are 20 years old and expect to start receiving payments from the annuity around the age of 50, then your payments into the annuity will probably be relatively small and spaced out over the next 30 or so years.

Deferred annuities and immediate annuities are the two most popular kinds of annuities. A deferred annuity simply refers to a type of annuity into which you make payments over a period of time and receive payments from the annuity after that period of time has ended. An immediate annuity differs from a deferred annuity in that you pay your part immediately upfront, and thus receive payments much earlier. The terms fixed and variable, when used in association with annuities, refer to the rate of return. A fixed annuity provides a rate of return that is steady; a variable annuity provides a rate of return that fluctuates depending on the market conditions.

If you’re interested in purchasing an annuity, all you have to do is run a quick Google search; there are hundreds of companies out there that sell annuities. Also, insurance companies tend to sell annuities in addition to their insurance products. Make sure to do research on the company from which you are purchasing an annuity; if they go out of business, then you won’t get the guaranteed income that you counted on. Check out the ratings assigned by Standard & Poor’s or Moody’s Investor Service to see if the company you have your eye on is a good one.