An individual buys an annuity from an insurance company and pays a lump sum or a series of payments over time. In return, the insurance company guarantees that the funds will grow at a tax-free rate. The earnings rate may be guaranteed for a period of time in a fixed account annuity.
Variable annuities are unique because the account value can change with fluctuations in market investments and other market conditions. This type of annuity can only be invested in specific investment types such as fixed investments or common stock.
If the individual elected the life annuity option, then the payments from the annuity may continue for the duration of their life.
There are a number of different options that determine the eventual size of the payments each period. The account value, distribution length, number of beneficiaries, and interest rate all determine the size of the payment.
If you select the right options and riders on the annuity contract, you may even be able to specify that the payments continue after you pass away. The payments may continue to other members of your family, but these additions often come in the form of higher premium payments.
Investors should consider the investment objectives, risks, charges and expenses of variable annuities and their underlying funds carefully before investing. The prospectus contains this and other information and should be read carefully before investing. The prospectus can be obtained from the financial representative offering the product.
One of the beneficial features of an annuity contract is that the account funds are not taxable until they are withdrawn from the account. This allows you tax-deferred growth throughout the duration of the accumulation period.
The insurance component, of course, is the guaranteed regular monthly income payment for the rest of your life, reducing the worry of your retirement income budgeting. In addition, should you die before you begin receiving payments, your heirs are guaranteed to receive the full amount of the original principal.
It is important to understand that certain actions outside of the design of your account may result in penalties, additional charges, or penalties that can affect the account value. Be certain that you have read the prospectus thoroughly and understand the ins and outs of the annuity contract. You do not want to be caught unawares of certain provisions and chargebacks.
The world of fixed rate annuities can be rather complicated. To get more details on this type of investment, be sure to visit Luke Murray at The Fixed Annuity Guide.