Definition of Annuity: All You Need to Know About Annuities

Definition of Annuity: All You Need to Know About Annuities

different types of annuities

So what is an annuity?

An annuity, in the most basic of terms, is an agreement you make with an insurer to make a payment or multiple payments to them in exchange for a certain amount of income for a set period of time. They allow the annuitant, or person buying the annuity, the security of not outliving their savings and guarantee them a chance for ongoing income into their retirement years. As end of life income becomes more and more concerning for current and future retirees, the safety of an annuity can alleviate the worries about one’s survival into their golden years.

Benefits of Annuities

An annuity is a great way to guarantee financial safety in the future. With a guaranteed payout, you can rest easy knowing you will have some form of income in the later years of your life.

It also allows you to defer taxes while you save. While your money compounds interest within an annuity, you won’t be charged taxes on the account. Taxes will be held off until you begin withdrawing, which means your earnings will not be hindered by potential deductions. You can also select payment options that help reduce future taxation on withdraws.

You have a variety of options with annuities that allow you to customize the manner with which you utilize and receive your future savings. What type of annuity you choose, the method with which you withdraw and the timing of payments allows you to tailor your earnings to the future you have planned while also leaving you opportunities to adjust if unexpected situations arise. You also have the option of ensuring loved ones after your passing to provide you an extra feeling of relief.

Length/Periods of Annuity Payment

Your options for annuity lengths allow you immediate payments or a deferred annuity that allows you to earn interest on your payments into the annuity.

These payments will depend on the time period decided during the purchase of the annuity. It can be a month, a year, a quarter, etc. and will determine how often a person receives money from their annuity.

With an immediate annuity, you will start getting your calculated payment amount after waiting on only one time period after the annuity is bought.

A deferred annuity will earn over a period of time without paying out to allow the buyer to save more as they go along. The waiting period for these can be quite a while for the buyer, but they will allow money to compound as they grow from interest and premiums.

Our calculator can give you a better idea of your hypothetical earnings and pay outs as you plan your strategy for your annuity.

Safety/Security of Annuity

While annuities do depend on the success of an insurer, they are beneficial in the long run and provide their own kind of safety to an investor as they help to prevent longevity issues that may like ahead for a buyer’s nest egg. The stability of insurance companies, in the long run, tends to be greater than that of a bank as it relies on contracts and annuities as opposed to a bank, which relies more on liabilities like deposits that makes them more variable.

By law, the insurer has to keep a larger percentage of your investment on reserve, unlike a bank. This means there is a better back up on your investment that’s onhand at all times.

A big concern, of course, is the security of the insurance company. While stability is a top ranking concern for all insurance companies, should an insurance company fail or fall into financial trouble, often times, another company will buy from them and pick up your annuity, allowing you to maintain your contract. This means your pay outs will still be secure, only under another company’s name.

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