Understanding How Annuities Work Can Help You Make Better Investment Decisions

Annuity has become a popular insurance investment choice for many middle-aged people

. You shouldn't feel overwhelmed or discouraged when dealing with all of the difficult investment terms and attempting to understand annuity. Here is a guide to the basics of annuities and how they work:

Explanation of annuity

Annuity is a type of insurance investment in which you, as the insured investor, receive periodic payment returns starting in a guaranteed year. You will usually receive your annual returns throughout your lifetime or for a certain period of time. You can purchase your annuity in payments spread out over a long period of time or you can pay for it up front with cash.

How annuity benefits you

There are many ways an annuity can benefit you. First, it will be a primary source of income in your retirement planning. In time for retirement, the majority of annuities start paying out at the age of 60. You will continue to periodically receive amounts from your annuity even after you no longer have a job. This kind of investment is good if you need to plan something in the distant future. It is great if you want to save for your 5-year-old child's college education or for some other long-term goal. The benefit of a tax sheltered annuity is that taxes on the saved amount are paid at a later time, when one's income (and therefore tax liability) will likely be lower. The reason for this is that your investment earnings will only be taxed after your returns have been paid out. You can find annuities to meet your needs. An insurance agent who has utilized Annuity Leads can gain a better understanding of your goals which ensures that you will be matched with the appropriate type of annuity from investment companies.

Kinds of Annuity

Depending on your annual wages, your premium payment terms, the conditions of your returns payment, and other annuity variations, there are different types of annuities.

Dependent on premium terms of payment. Annuities are available in two different forms: a single premium or a flexible premium. One premium annuity will allow you to pay it off in one lump sum payment. The great thing about flexible premium annuities is that they cost less in the short term.

Your annual earnings is going to be the deciding factor for the outcome. The yearly payment can either be a specified amount or an amount that can be changed from time to time. The annuities that ensure a fixed amount of annual returns, along with the principal as well as interest, are technically termed as "Fixed Annuities." Such annuities normally get invested into conservative instruments like government bonds. Alternately, variable annuities are a part of more flexible investments, like mutual funds. If you choose to purchase a variable annuity then you are not guaranteed payments on any sort of regular basis.

The resulting outcome will depend on your returns payment terms. With regards to the payment of your returns, you can either opt for term annuity or life annuity. If you wish to receive scheduled payments over a set period of time you should get a term annuity. In most term annuity policies, if you pass away during your payment period, your beneficiary is entitled to receive the remaining returns. You are guaranteed payment for the rest of your life with life annuity, but after you pass away payment shall be stopped and no refund will be issued.

Other variations. Created in such a way as to perfectly suit the requirements of married couples, Joint annuity is thus another special kind of annuity. It is structured in a way that if one you passes, the surviving spouse continually receives the regular payment returns. Term certain is also another type of annuity that combines both term annuity and fixed annuity, where you receive fixed return payments for a fixed period of time.

Key factors affecting the annuity payments

There are multiple factors that can influence how much your annuity will pay. The higher the amount of your principal and your interest earnings, the higher the payment returns. Demographics also play a vital role. For instance, if you reside in a state where life expectancy is higher you may get less periodic returns, especially when it comes to life annuities. You may get from the insurance company smaller annuity amounts if the tenure of the insurance policy is for a longer period as compared with the short term annuities where such type of facility may not be available.

How you pay applicable taxes

Annuities are not exempt from taxes, but the great thing is that they are deferred. Only when you are getting paid returns are you responsible for paying taxes on it. There are prescribed, as well as non-prescribed annuities. Prescribed annuities are those that allow for payment of taxes evenly all throughout the term of your policy, while non-prescribed annuities are those that allow for payment of taxes in a gradually decreasing manner until taxes reach zero.

Make sure you decide which type suits your condition and your future needs best, when you plan to make use of an annuity. To get the most bang for your buck, do a cost comparison between various insurance or investment organizations.

by: Patricia Strasser

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