Understanding Annuities
Let’s start from scratch assuming your basic question is: what are annuities
and that you seek a basic overview about annuities. To have annuities explained
clearly, just follow along with this overview.
Annuities come in several “flavors” but annuities investments
all have the following in common:
- You make a deposit or series
of deposits with an annuities company – always a life insurance
company.
- The insurance company pays interest or provides opportunity
for gains on your deposit.
- All annuities are deferred annuities
meaning that the taxes due on your interest or profit are
deferred until withdrawn.
Let’s further explain annuities by
discussing the different types of annuities within the general
overview of how annuities work.
Retirement Annuities (also called pension annuities)—people
use this term to mean an annuity purchased or received at
retirement from a company that pays a life time income, basically
a pension annuity. In this case, immediately after the deposit
by the investor, payments start to flow. These are more
generically called immediate annuities.
Guaranteed Annuities—also called fixed annuities—the insurance
company guarantees your original deposit and pays a fixed
rate of interest that is guaranteed (in advance) for one
or more years.
Variable Annuities—offer a menu of investment option, similar
to mutual funds, to which you allocate your investment. The
insurance company will not guarantee your principal because
you may gain or lose money based on your investment choices
and the market. Some of the bigger issuers of these are Pacific
Life annuities, New York Life annuities, Jackson annuities
and AXA annuities.
Fixed Annuities—fixed annuities are guaranteed annuities
in that the insurance company guarantees return of your original
principal
Equity Index Annuities—a fixed indexed annuity whereby the
insurance company guarantees your original investment and
pays interest each year based on the performance of the stock
market.
Bank Annuities—may be any of the above sold by an insurance
agent working at the bank. You can buy annuities from most
any licensed life insurance agent. Buying annuities is a
simple as writing a check and signing the application.
Are Annuities Safe?
Fixed annuities all have a guaranteed return of principle.
So on a list of annuities pros and cons, safety is at the
top of the list. You can find annuities ratings (the safety
rating of the various life insurance companies) from AM Best
or a number of other sources. Read more to compare
annuities.
Are Annuities a Good Investment?
They appear to be very suitable for many people as Americans
hold well over $1 trillion of annuities. |