With a fixed annuity , the insurance company guarantees the buyer a specific payment at some future date—which might be decades in the future or, in the case of an immediate annuity, right away. In order to deliver that return, the insurer invests money in safe vehicles, such as U. Treasury securities and highly rated corporate bonds. While safe and predictable, these investments also deliver unspectacular returns. Even so, fixed annuities can be a good fit for people who have a low tolerance for risk and don't want to take chances with their regular monthly payouts.
With a variable annuity , the insurer invests in a portfolio of mutual funds chosen by the buyer. The performance of those funds will determine how the account grows and how large a payout the buyer will eventually receive.
Variable annuity payouts can either be fixed or vary along with the account's performance. People who choose variable annuities are willing to take on some degree of risk in the hope of generating bigger profits. Variable annuities are generally best for experienced investors, who are familiar with the different types of mutual funds and the risks they involve.
If an annuity buyer is married, they can choose an annuity that will continue to pay income to their spouse should they die first. Annuities can also be either immediate or deferred , in terms of when they begin to make payments. The basic question buyers need to consider is whether they want regular income now or at some future date.
As with fixed and variable annuities, there are some trade-offs. A deferred payment allows the money in the account more time to grow. And much like a k or an IRA , the annuity continues to accumulate earnings tax-free until the money is withdrawn.
In annuity jargon, this is known as the accumulation phase or accumulation period. An immediate annuity is just what it sounds like. The payouts begin as soon as the buyer makes a lump sum payment to the insurance company.
Deferred annuities and immediate annuities can both be either fixed or variable. There are some other important decisions to make in buying an annuity, depending on your circumstances. These include the following:. Insurance Information Institute. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. You can benefit from bull markets but also suffer from downturns when the bears start roaring. For a fee you can add a death benefit feature, for example. With an indexed annuity , you can make a one-time payment or a series of payments.
It will also guarantee you a minimum return, though these minimums can vary from one company to the next. Some of the benefits of an indexed annuity may include:. Annuities can come with high fees, so make sure you know the cumulative cost before deciding whether to buy one or not. There are several questions that you should ask yourself and an insurance agent to gain a greater understanding of any annuity you are considering.
Ask yourself:. Ask your insurance agent or financial advisor:. Each type of annuity has its own advantages and disadvantages. One of the major benefits of an annuity is that it allows you to build up money for retirement, so that when you do close that office door, you can take a lump-sum payment or create a consistent income that can last for either a certain number of years or life.
You are also able to build up money on a tax-deferred basis. Some of the drawbacks of investing in annuities include high fees, such as surrender fees if you need the money early and up-front and annual fees that may apply. It pays to take your time examining the different types of annuities in order to determine which will work for your situation. Securities and Exchange Commission. Accessed May 27, Internal Revenue Service.
Life Insurance. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice.
Popular Courses. We use the gender and age provided along with the Centers for Disease Control and Prevention life expectancy table to estimate the number of years you could receive payments starting one month from when you enter your data. With a deferred annuity , the investor receives payments that start in the future.
Typically, this happens when the investor retires. In the meantime, the investment grows on a tax-deferred basis. Generally, annuities protect against longevity risk. With these annuities, the amount of the payment will be set based on the health and age of the annuity holder. An example of a fixed-period annuity, also known as a term-certain annuity, is a lottery prize. In many cases, lottery winners can elect to receive their windfall as an annuity.
Those payments are spread out over a fixed period, typically 20 or 30 years. With these annuities, the age and health of the annuity holder do not affect the amount of the payments. There are numerous ways to design annuity contracts to include provisions for the owner and of the annuity and their beneficiaries.
For example, there are qualified and nonqualified annuities. This refers to whether the annuities are held in qualified retirement accounts and covered by the same laws regarding taxation and withdrawal requirements. When an annuity holder needs access to funds tied up in the annuity contract, he or she can sell the rights to receive future payments on the secondary market. Often, these sales involve structured settlements. Structured settlements are settlements in legal cases that involve payments over time.
If someone is severely injured, for example, he or she might sue a company that manufactured and sold the product that caused the injury. In a structured settlement, the company would agree to pay a certain amount of money over a period of years. Those payments are typically from an annuity issued by an insurance company. They are often structured or scheduled to provide a dependable stream of income, along with financial security, to the injured party.
But then, if the injured person encounters expenses that exceed the amount of the payments, he or she might sell the rights to receive the payments to another company — an insurance firm or other entity. Most states require factoring companies that purchase structured settlements to disclose this difference between the value of the future payments and the amount of the lump sum being offered to purchase them. In addition to structured settlements, these transactions may involve other kinds of annuities, such as lottery prizes that winners elected to receive as annuities.
When the lottery winner decides to sell a lottery annuity, they are doing so at a discounted rate. The company that purchased the structured settlement payments and other annuities may sell them to investors on the secondary market. Investors who purchase annuity contracts on the secondary market may be attracted by the higher rates of return.
These annuities contracts carry a lower risk that the issuing company will default on payments. If you buy an annuity that was previously owned by someone else, you may get a better interest rate or higher payments than if you buy an annuity on the primary market. The annuity, in other words, cannot be resold. Some critics say these purchases are best left to sophisticated investors.
You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines. Click here to sign up for our newsletter to learn more about financial literacy, investing and important consumer financial news. If you're interested in buying an annuity, a representative will provide you with a free, no-obligation quote.
SMS is committed to excellent customer service. The company can help you find the right insurance agent for your unique financial objectives.
Your web browser is no longer supported by Microsoft. Update your browser for more security, speed and compatibility. If you are interested in learning more about buying or selling annuities, call us at Annuities View Subpages. What Is an Annuity? Annuities Explained. Indexed Annuity. Buying an Annuity. Reasons to Buy an Annuity. Current Rates. Immediate Annuity Calculator. Structured Settlements View Subpages. What Is a Structured Settlement? How They Work?
0コメント