Many people often ask, "What are annuities?" when talking about the different investment options that are available. Annuities are an often misunderstood type of investment that can provide individuals a great deal of security during retirement. Understanding annuities and how they work can help individuals plan for retirement more effectively. Here are a few things to consider about annuities and how they work.
What are Annuities?
An annuity is a type of contract between an individual and an insurance company. Under this type of contract, an individual agrees to make payments to the insurance company. Then when they retire, the insurance company will make regular payments back to the individual for a certain amount of time. The payments could last for a specific number of years or they could last for the lifetime of the individual.
Different Types of Annuities
There are several different types of annuities that are offered in the market today. An investor could choose between many different established companies when investing in this type of contract. For example, an investor could choose between New York Life annuities, Met Life annuities, or Pacific Life annuities and work with some of the biggest names in the insurance industry.
One type of annuity that these companies offer is the fixed annuity. With a fixed annuity, an investor will make payments and then receive a fixed amount of return on the annuity. This will provide the investor with a fixed payment during retirement.
A variable annuity is a different type of contract in which the investor gets to choose the investments that the annuity money goes into. This provides a variable payment during retirement based on the performance of the investments.
An equity indexed annuity is another type of contract that is linked to a financial index such as the S&P 500. If the index performs well, the annuity will also perform well. This type of investment gives investors some exposure to the market but gives them a minimum amount of return at the same time.
Secondary Market
If an individual chooses not to keep an annuity contract once they are receiving payments, they could also sell it on the secondary market. Many investors want to sell annuity payments because their circumstances change and they would prefer to have a lump sum of money. If an investor desires to sell annuity payments to another investor, they will need to use an annuity calculator. The annuity calculator will help them calculate the present value of the annuity so that a fair selling price can be determined.
Source:
- Investopedia, An Overview of Annuities, (accessed 9/5/10)
Luke Arthur - Luke Arthur is a freelance writer with more than five years of experience in the industry. He has a bachelor's degree in business from ...
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