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A Beginners Guide to Annuities

By Compuquotes Team on March 27th, 2008
Annuity

Why get an annuity?

You want to provide a guaranteed, sure income source for yourself when you retire. The annuity can be flexible enough to provide you with several options and types of annuity contracts to help you get the kind of income that you foresee during your retirement. However specific your retirement needs are, the various options available may further be tailored to meet your specifications.

Basic features

Annuities have their share of advantages compared to other investment or financial vehicles. The income earned may be subjected to tax deferment for later payment. The annuity serves as your guarantee to income support for life. Payment may be made in lump sum or in installment/periodic amortizations. You can also borrow against your annuity.

Types of annuities

Fixed annuities guarantee returns on premium payments at fixed guaranteed interest rates. Variable annuities rates are not guaranteed as the risk is shared by the investor; there is greater possibility of the return being higher though.

Immediate annuities are paid via single premium payment because the payment of benefits will begin at once, usually within a year after purchase of the annuity. In deferred annuities, you decide to have the payout start at a future date of your choice.

How to pay for annuities

There is a period of lapse from the time you purchase an annuity until such time that you begin to receive income or benefits. This is what is referred to as the accumulation phase. During this phase, you can choose to pay the premium one time in lump sum or in periodic or installment payments over a defined period of time.

The premium payments are your purchase cost for the annuity. Whether you pay the premium singly or one-time, in equal or unequal installment amounts, is entirely up to you depending on your capacity.

Benefiting from annuities

The benefits your derive from annuities will depend on the paid premium amount, the earnings or returns of the premiums you paid, the costs or charges levied on the annuity.

If you need immediate income, you can get a single-premium immediate annuity if you had a windfall in inheritance or real property sale or recent early retirement.

If you want to invest and you have the money but you're sure you will be needing the money some time in the future, you can get a single-premium deferred annuity. It will generate larger payment of benefits as the premium earns interest over time.

Should you want the benefits to be paid in the future but in fixed or guaranteed amount, you can make fixed periodic payments or equal amortizations at regular or fixed intervals.

A flexible premium annuity will allow you to make premium payment in varying amounts although the final amount of benefits to be paid in the future cannot be readily determined in this case.

Basic provisions of annuities

These include both positive and negative provisions depending on your points of view. Administrative fees, withdrawal privileges, surrender charges, loan contracts are the basic provisions, in addition to the previously mentioned features of annuities.

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