Saving money is perhaps the most important facet of a person’s financial life. People save money for a number of reasons. They save to create a nest egg for their retired life, to obtain tax benefits and to make significant investments which would grow over time. However, all sorts of financial tools don’t provide all these advantages.
There are only a few that can efficiently satisfy these requirements and annuity plans can be considered as one of the most common and useful of them. Annuities are contracts between a purchaser and an insurance company, which ensure returns on the investment made as premiums. Usually, annuity plans ensure regular payment upon annuitization (the method of transforming annuity investments into a steady series of cyclic income payments), as long as the annuitant or his/her spouse is alive.
Annuity – Definition
Annuity can be defined as a special type of personal insurance that ensures a regular tax-deferred income. This investment tool entitles the annuitant (the annuity purchaser) to a series of annual payments. An annuity is an agreement entering into which the purchaser needs to make either a series of payments or a lump sum one. In return of that payment, the insurer makes episodic payments to the annuitant as long as he/she is alive and can meet long-term financial goals.
Annuity – Types
There are mainly 3 types of annuity plans available in the market and those are fixed annuity, indexed annuity and variable annuity.
- Fixed annuity – In a fixed rate annuity, the insurer guarantees to pay the annuitant no less than a particular interest rate on his/her investment during the years of the individual’s account is growing. The insurer also ensures to pay episodic payments that will be of a particular amount on each dollar in the annuitant’s annuity account. The episodic payments usually last for a specific period of time like 20 years or a non-specific period like lifetime of the annuitant.
- Indexed annuity – In an indexed annuity, the insurance provider credits the annuitant’s account with a return depending on the performance of the stock index, e.g., Standard & Poor’s Composite Stock Price Index. But even if the index doesn’t perform up to the mark, then also the annuitant will get no less than a particular minimum amount as a return on his/her investment.
- Variable annuity – In a variable annuity, the money is mainly invested in stock market or mutual funds depending on the annuitant’s consent. Such annuity plans ensure low guaranteed interest rates, but they have the potential of producing huge return.
Annuity – Benefits
Annuity plans offer a number of benefits. And the biggest of them is that they allow the purchaser to put away good amount of money and ensure tax-deferred income. Other benefits may include,
- No limit on yearly contribution – The annuitant can sock away any amount for his retirement. It is especially beneficial for those about to retire.
- No tax bill – The amount the annuitant invests in an annuity plan will be compounded over the years without letting him get any tax bill from the government. And thus he can make every hard-earned dollar works for himself.
- Different payment options – When it comes to cash out, an annuity purchaser can take his payment as a lump-sum or through guaranteed payments for certain years, e.g., 20 years or until he is alive.
Discussed is just an overview on annuity plans. Before one opts for and invest in an annuity plan, he must talk to a reputed annuity agent in his locality.
Author’s Bio – Jonny is a veteran annuity industry blogger. He regularly contributes to My Pension Expert.