What Is An Annuity?

Exploring options other than Individual Retirement Accounts (IRAs) and employer-provided retirement packages has become a common practice

. An increasing number of people are seeking investment tools that provide a solid return after retirement. One of the most popular choices nowadays is annuities. But first you have to learn what is an annuity.

What Is An Annuity?

An annuity is an insurance product. Insurance companies offer investment plans that allow you to save your money with them. Year after year, interest is generated on the amount of money you have invested. Over the years, your savings grow substantially and you are left with a solid fund for retirement.

Generally, annuities are offered by life insurance companies. However, there are no life insurance benefits on offer to the annuity holders. You the right to claim your investment and the interest you have earned on it over the years. The rate of interest is usually dependent on how well the company is performing. The financial strength ratings of insurance companies are a good indicator of the best annuity providers.

Basically, there are two types of annuity schemes. Here is an overview to help you understand what is an annuity.

Fixed Annuity

A fixed annuity is a plan under which you stand to receive a fixed rate of interest on your investment. It is regarded as the safest form of annuity. The low risk investment options does not offer high returns but there is little to no chance of losing your money. This is why it has become a highly popular investment tool.

Variable Annuity

The major difference between fixed and variable annuity is in the rate of interest. The interest rate varies from annum to annum under a variable annuity plan. This means that you can receive a lower or higher return on your investment in the coming years. Variable annuity is more risky than a fixed rate annuity but has the potential for providing a higher rate of return.

Knowing about the two major types of annuities is essential for understanding what is an annuity.

The length of the annuity plan can vary as well. Some people opt for a fixed term annuity, which earns them interest for a specified period, such as five or ten years. You have the option to convert your annuity plan to a lifelong one. It is a great way to save money and receive income after you have retired.

There are two alternatives regarding when you receive the money from your annuity account.

Immediate Annuity

An immediate annuity plan provides you a regular income over a period of time. The amount of money accumulated in your account is paid to you on a monthly basis. You can change the payment period according to your preference.

Deferred Annuity

You can change your deferred annuity into an immediate annuity and receive regular payments. On the other hand, you can receive the entire amount at once and use it to finance a new immediate annuity scheme.

The different income options ensure you get exactly what you want from your investment.

These are some characteristics and features that help you understand what is an annuity.

by: Sachin Kumar Airan

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