Annuity definition and how they work

Annuities are confusing to most people. There are many different types, and they are all basically the same: a product in which an insurer makes payments to the insured for the life of the insurer. The seller is also known as the issuer. These payments to the buyer (also known as an annuitant) are for immediate payment of a single payment (lump sum cash) annuity or regular payment annuities that come in a series of regular payments to the issuer.

A good example of annuities is when a person receives a large settlement from a lawsuit. A business can purchase the lump sum and then make payments to the settlement recipient for the term of its life.

Most annuities have an indefinite period as there is no way of knowing how long a person may or may not live.

Annuitize means that the contract owner (renter) is ready to begin withdrawing or receiving funds from the annuity. The more premiums have been paid into the annuity, the longer the payments will continue.

Most people choose to pay an annuity over time before taking out the annuity in order to receive payments for life.

Some contracts may have provisions for a beneficiary to receive funds if the contract owner dies before the annuity runs out of funds.

Not all rentiers are owners of the contract. A consumer may choose to purchase an annuity and designate a family member, such as a spouse or child, as the annuity beneficiary. This person will receive the annuity funds for life or until the annuity runs out of funds.

Different Types of Annuities

There are many different types of annuities on the market today.

• Lump sum annuity is when insurers buy a lump sum.

• A regular pay annuity is when a business buys a settlement in exchange for regular payments, usually a promise from the business or person to pay a claim (regular pay annuity).

• Fixed annuities make payments in a fixed amount or that will increase over time by a certain predetermined percentage.

• Guaranteed annuities are also called pure annuities. These annuities are issued to a beneficiary who may die before their original payment is recovered, but payments will continue to a beneficiary.

• A joint annuity is similar in that the payments are structured so that payments continue to the surviving spouse, although payments will stop if the surviving spouse dies.

• Impaired annuities are offered to people who have a serious illness that will shorten their life expectancy. These are only slightly different from other types of annuities, and a health insurer must be involved in creating this annuity.

Who benefits most from annuities

Annuities work well for anyone who may have reason to believe they will need retirement income beyond savings or to help families in times of economic uncertainty. Someone who has been injured can benefit from annuities. Another situation would be for someone who discovers that they are suffering from a chronic or terminal illness. An annuity would allow them to leave work and focus on treatments, while still paying the bills.

Annuities offer excellent interest rates compared to savings accounts. The cumulative action of interest in an annuity will create a lifetime of income for anyone who can invest in an annuity. One of the best known annuities is the 401K, which is offered by many employers. If you’re considering a 401K, annuities can fit anyone who’s working.

Premium Information

An annuity premium can best be explained as the money paid into the annuity. These premiums are deposits into the annuity itself, just like bank deposits. Each payment made as a premium is a payment to the annuity; these payments will be withdrawn by the renter eventually.

Unlike many insurance contracts, all premium payments made in an annuity can be considered payments from the ‘current’ self to the ‘future’ self. For example: today someone buys an annuity for $20,000; In ten years, the same person can withdraw money from that same $20,000. Bonuses are loans to a future self.

Pros and cons

There are features of annuities that can be beneficial to the consumer. For example, a tax-deferred growth annuity and often a compounding clause. Most annuities have guaranteed rates of return for every dollar invested in the annuity. Choosing to annuitize can also result in lifetime payments.

Different annuity companies have various other benefits that may be beneficial to the collecting party. Each addendum to the contract will have specific functions and should be carefully examined.

There are also cons, such as the fact that each guarantee must be financed in some way. When a consumer does not need a guarantee, the collector should not buy them. Cash can be held for some time if the purchased contract has a redemption period. Consumers should avoid a contract with a redemption period unless they have other sources of income such as stocks, mutual funds or savings.

The Internal Revenue Service restricts how annuities are withdrawn or used.

Withdrawing money from the annuity can result in the cash being taxed or even having penalties attached.