An annuity is a type of financial investment that can help to round out an investment portfolio. Annuities are available in many different forms, with a variety of benefits and terms. It's important to discuss your annuity options with your financial planner before investing in annuities.
The Meaning of Annuity
To understand what an annuity is, it's helpful to know that the word annuity refers to the word annual. So annuities are based on a yearly contract schedule. For investment purposes, payments from an annuity plan may be paid out one a month for a year, or once a year.
Money In and Money Out
Annuities require that the investor pays into the policy, making monthly or yearly contributions, much like you might pay into an insurance policy. The contributions you make go into an interest-bearing account, from which the annuity company both makes payments and receives profit.
The payouts begin at a certain date in the future. So for instance, a young person could start paying into the annuity account and then begin taking payouts after they retire. This might result in quite a large contribution "kitty," from which the payouts would be funded.
Different Than Life Insurance
Though annuities might sound a lot like a standard life insurance policy, there are quite a few differences. First of all, the annuity payouts are designed to benefit the investor while they are still living. Annuities are intended to provide financial support during retirement, not after death. Second of all, certain annuities pay out more than the sum of the original investment. So, if for example, a person lives much longer than they ever hoped to, their annuity payouts would never cease. This one feature is one of the reasons why your financial planner may suggest making an investment in annuities.
Terms and Benefits Vary
Remember that the terms of annuities vary considerably from market to market. There are as many different kinds of annuities, and each one represents a financial contractual obligation you would enter into. Sit down with your financial planner to discuss all the fine points of any annuity you may be considering. Also, make sure you understand all the terms and your responsibilities as an investor.
Annuities can be complicated investment vehicles, but once you take the time to learn how you can benefit and work closely with a financial planner, they can be a substantial part of your overall retirement plan.