An annuity is a contract between you and your insurance company and let your profits increase and capitalize deferred taxes. The tax deferral is a very important to help accumulate money for retirement or other financial goals to meet long-term benefit.
The term “annuity” literally means “annual payments “. In addition to accumulation phase, the annuity also has a stage payment. When you buy an annuity, the insurance company agrees to pay you an income for a period of time; whether it starts immediately (an immediate annuity) or after the accumulation period comes to an end (a deferred annuity).
What types of annuity are available?
There are two main types of annuities: deferred and immediate you.
In the case of an immediate annuity, payments begin in revenue immediately. You decide if you want the revenues are guaranteed for a certain number of years or lifetime. The insurance company calculates the amount of each payment in revenue, according to the insured amount and your life expectancy.
A deferred annuity has two phases: the accumulation phase, during which money increases and the payment stage, which is when you begin to receive scheduled payments. During accumulation, increase profits based on deferred until you withdraw the money tax. You decide when to take income from your annuity.
The payment stage begins when you withdraw your annuity income. For most people, this happens during retirement. As determined by your needs, you can withdraw money partially, completely cancel your annuity or convert a stream of payments for ongoing income, which is called annuitisation. Basically, the latter option is equivalent to purchase an immediate annuity.
Fixed annuities and variable differ
in the way they generate profits and also on the amount of risk involved.
When you purchase a fixed annuity, the insurance company guarantees an interest rate for a period of time. At the end of this period, the insurance company will declare a renewal interest rate and a warranty period. In addition, most fixed annuities have a minimum interest rate that is guaranteed while the contract is in force. In other words, regardless of the market situation, you will never receive less than the guaranteed interest rate. Usually they fixed annuities are attractive to those who feel more comfortable knowing exactly how much money you are earning.
In the case of a variable annuity, you have more control over your investment. You distribute the funds through a variety of investment options, the objectives are from aggressive to conservative; is what insurance companies called sub. - accounts. The performances of its investments are linked to the performance of the underlying investments of the sub – accounts. Generally, variable annuities are attractive to investors are willing to accept a higher return for the possibility of higher growth rate risk.
As an investment in securities, the amount of capital gains and investment in a variable annuity are not guaranteed and will fluctuate according to the performance of the implicit and when these investments are redeemed, an investor’s units may be worth more or less than the original cost.
Fixed annuities and variable offer a rich mix of capitalized interest and tax deferral. When your earnings are not subject to taxes each year, they are capitalized faster. The rapid growth of your money means more disposable income for you long term.