How to Choose the Right Annuity for You
Annuities can be a very effective and practical way to either produce a lifetime income, put away money for your retirement fund, or leave an inheritance for your family members when you pass away. However, as with many services which involve financing, the plethora of options available does make the prospect of investing in annuities, a somewhat complex and daunting task. The following article will seek to demystify some of the confusion regarding annuities, by breaking them down into easily manageable and understandable categories. With this information, you will now be more than capable of deciding which form of annuity is most suitable for you.
Perhaps the most common type of annuity is a fixed annuity, which, like all annuities, comes in the form of a written contract offered to you by your insurance company. Fixed annuities are not in any way tied to the stock market and are therefore totally risk free, guaranteeing that you’ll make a predetermined rate of interest on the money you invest. Within fixed annuities, there are two options available to the prospective investor: immediate annuities or deferred annuities. With immediate annuities (often referred to also as ‘single premium’ annuities), the investor typically pays a single large sum of money into their fund and shortly afterwards, begins to receive small regular payments from that initial investment, generally on a monthly or annual basis. A deferred annuity however, is for when you want to start accruing money on a tax-deferred basis, in order to generate a lump sum to use at some stage in the future.
Variable annuities are considerably more complicated than fixed ones. With a variable annuity, your insurance company will agree to make consistent payments to you, based on an initial lump sum payment or series of individual payments. Unlike fixed annuities, variable annuities combine elements of mutual funds, tax deferred retirement savings plans and life insurance. With variable annuities, you also select a number of different mutual funds to invest in. During the first phase of a variable annuity, you will be paying money into the annuity. That money will then be used across a number of varying investment options such as balanced funds, money markets or international funds. Naturally, the money you invest will either increase or decrease according to the performance of your various investments. Having hopefully made a considerable amount of money through your various investments, you will then be able to access the money made either as payments or in a lump sum.
Which One to Choose?
Essentially, there is far less risk in fixed annuities, but there is also less money to be gained. On the flip side, variable annuities can be very risky, but can also lead to substantial financial returns. Before making any big decisions regarding your choice of annuity, it is strongly advisable to speak to an expert from a reputable firm. Click here to do so.