subject: The Pros And Cons Of Annuities [print this page] Retirement is an important phase in every person's life. Most people prepare for their retirement by making various investments that will give them protection and financial stability in the future. Especially in their old age where they are no longer capable of working and only want to spend the rest of their lives doing the things that they love. One of the most common investments is annuities. It is a safer investment compared to stocks and other forms of insurances.
What is an annuity?
Annuities are income generated from a capital investment. Just like an insurance premium, if you purchase an annuity contract, you are investing an amount of money in one company where the company bears the "risk" of you living a long and happy life. It is a risk on their part as you will be paying a premium for a fixed period of time and at the end of the payment term, the company will be giving you the same amount, or higher, every month for as long as you live. Payment terms are usually 20-30 years and you will start receiving paychecks for your annuities after your premium is paid up.
How does it work?
If you want to purchase an annuity contract, what you are actually doing is investing an amount of money in a company that you will pay for a fixed period of time in the form of a premium. At the end of the term, you will be receiving the same amount of money for the rest of your life. There are many types of annuities and the most common are the fixed annuities and the variable annuities. The fixed annuity is the safest type of annuity, as you are assured of the same interest rates for a fixed period of time as opposed to the variable annuity which involves higher risks in terms of interest rates and the amount of money you will be receiving at the end of the payment term.
Benefits of annuities over other retirement tools
Among other benefits, annuities are perfect investment option for those who do not want to risk losing their savings over an unstable investment such as stocks or businesses. Investing in annuities is a very safe option for retirement as you will receive a fixed income for as long as you live. You also have the option to add an inflation protection to your annuity so that your paycheck will keep up with the rising cost of living. Other than that, annuities are backed by the state fund guarantee so your investments will not go to waste if ever the company will not be able to pay you back your investments.
Disadvantages of annuities
Since annuities are fixed investments, you are foregoing the chance to get higher returns in your investments as you would if you invest in other assets that have fluctuating values. Annuities are also inflexible and cannot be used in times of emergencies. If you withdraw your annuities earlier that you're supposed to, it will be subjected to up to 10% of penalty tax.
