An Annuity is an insurance product that pays out income. And it can be used as part of retirement strategy. You can choice annuities to receive income stream in retirement. Annuities can be used to increase your saving or generate stream of income. Therefore check types of annuity payouts. You can see types of fixed annuities.
History of Annuities
Annuities are in one or another form since Roman Empire. At that time citizens will buy annual contracts from Emperor. They will pay lump sum to Roman government in return to receive an annual payment for rest of their lives. European governments also offered expenses to investors in return for lump sum investment.
Annuities came to America in 18th century for supporting church ministers. Pennsylvania Life Insurance Company is first insurance company in to market. Fixed annuities grew in status over time. Whereas first variable annuity is formed in 1952.
Basic Characteristics of Annuities
There are many types of annuities. All annuity contracts are in several respects.
They stand alone as commercial investment vehicle. That grows on tax-deferred basis without placed any type of IRA, qualified or other retirement plan.
Unless contract is seized in an IRA or qualified retirement plan. There is no limit to amount that may be invested and contributions are non-deductible. Of course, most annuities limits on amounts that they will accept.
Most annuity contracts also contain surrender-charge schedule. And this disappears after given period of time. Like 5 or 10 years. For example, 10-year fixed annuity contract may assess 7% early withdrawal penalty taken out during first year of contract. And 6% penalty for money taken out during second year and so on until surrender charge expires.
Variable and indexed annuities usually levy similar charges for early withdrawals. However, many contracts will allow you to pull out 10-20% of principal each year without penalty. It means this restriction as long as your age 59 1/2.
How an annuity works
You make an investment in annuity. And then it makes payments to you on future date. Therefore income you receive from an annuity can be monthly, quarterly, annually or in lump sum payment. Hence, your payments are resolve by variety of factors with your payment period.
This means they give access to lump-sum amount in order to receive guarantee lifetime income. Beneficiaries can choose several types of payout options. Hence, check How to go for right annuity plan (Not posted)
Straight Life: Contract will pay out an actual calculate amount to beneficiary. It is based upon his or her life expectation. This amount will be paid even if total payout exceeds. But amount will paid in interest or other gains. However, payment stops upon death of beneficiary. Even if less value of contract is paid back out. Insurance company keeps contract value even if receiver dies after getting only one payment.
Life with Certain Period: This will pay out either for life or for certain amount of time. Such as 10 or 20 years. If beneficiary dies soon after payments begin, then insurance company must pay out certain worth of payments to beneficiary. Either as series of payments or lump sum.
Joint Life: Similar to straight life, joint life annuities will continue to pay as long as one of two beneficiaries is alive.
Joint Life with Certain Period: it combines certain period payout with joint life expectancy.
Types of Annuities
Annuities can be divided into two broad categories. Like fixed and variable. Both are contracts with an insurance company. You pay premium (or series of premiums) and then receive payments at regular intervals for period of time.
There are three main types of annuities. Such as fixed, indexed, and variable.
Fixed Income Annuities: It pay certain rate of interest like CD or bond.
Equity-Indexed Annuities: It promises some portion of growth in stock market as guarantee principal.
Variable Annuities: It contains mutual fund sub-accounts that invest in stocks, bonds, real estate, and commodities. Such as precious metals and energy. Unlike other two types of annuities, principal is not guaranteed in variable annuities. This means that these annuities may lose value.
Annuities can also be categorized as either immediate or deferred.
Therefore immediate annuities start paying income to beneficiary as soon as contract is purchased
Deferred annuities do not begin paying out until later time.
All three types of annuities can fall into either of this category. Like fixed annuity can be either immediate or deferred, and so can an indexed or variable contract.
Finally, for more details types of annuity and their formula. Hence, see examples of annuities in real life. Probably, check types of annuity payouts. Check taxable annuity. Therefore see advantages and disadvantages of annuities.