Your Guide To Understanding Annuities Now
What is an annuity? Understanding annuities in laymans terms: An annuity is the accumulated money or capital that is generated by means of a series of; equal, unless mentioned otherwise; payments made. Annuities are, generally, used by insurance companies to deposit money into your account as a part of the retirement income plan or some other insurance policy that you may have purchased.
Purpose: An important step in understanding annuities is the purpose behind the purchase of the annuity. Why are you buying an annuity? Mostly people buy annuities as a retirement income plan. If you are a few years from your retirement and want to accrue some assets before then, then a deferred annuity is a better option (the payments start after your retirement, thus giving you a higher annuity.) If you want to start receiving your annuities immediately, then you should opt for an immediate annuity.
The Annuity Contract: The key to understanding annuities is, understanding the annuity contract. The annuities are deposited into your account after an agreement, or a written contract, is forged between the parties involved. This contract involves 3 parties; the owner, the annuitant (usually the same person as the owner, but is not necessary) and the beneficiary. Under this contract; the owner purchases the annuity and pays the premium. In short, he buys the annuity by paying a premium, or a lump sum, to the insurance company. The annuitant is the person who receives the regular and equal payments (annuity), and for whose needs and objectives the annuity contract has been tailored to. The beneficiary is the person who, in case of the sudden and unexpected death of the annuitant, gets the remaining annuities or lump sum.
Workings of an Annuity: While understanding annuities, people tend to forget to look into the premium payment structure. Understanding annuities' payment structure will help you make better decisions. It is up to the owner to opt for single premiums or multiple premiums. In a single premium payment, the owner is required to fund the annuity contract in one go i.e. he has to pay the entire amount of the premium as a lump sum.
A multiple premium payment lets the owner fund the annuity contract by multiple premium payments or deposits over time. He has the facility to increase his annuity base.
After understanding annuities premium payment options, you should also know that the money the owner pays is then invested into the market (risky and risk free asset markets) according to the owners objectives and requirements. The return that the investment earned is then paid out to the owner in the form of an annuity.
Cost of the Annuity: The cost, or purchase price, of an annuity is an extremely important aspect of understanding annuities.
Payments or Lump Sum: Another fact to remember when understanding annuities is that it is up to the annuitant to receive the money in the form of periodic equal payments, or collect them yearly in a lump sum from the insurance company.
Understanding annuities is a crucial step for the better maintenance of your investments or insurance policies.
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