Investments

An Annuity is a contractual arrangement whereby the policy owner pays a sum of money either by installments or lump sum to an insurance company in return for a stream of guaranteed income payments.

The income payments from the insurance company may start immediately or may be deferred some months or years, into the future.

The payments may be for a fixed period of time, like 10 years (fixed annuity) or may be based on duration of the life of the person on whose life the annuity is based (a life annuity).

THE VARIOUS TYPES OF ANNUITIES

Single-Premium Annuities

You can purchase a single-premium annuity, in which the investment is made all at once (perhaps using a lump sum from a retirement plan payout). The minimum investment is usually $10,000 or $25,000.

Flexible-Premium Annuities

With the flexible-premium annuity, the annuity is funded with a series of payments. The first payment can be quite small.

Immediate Annuities

The immediate annuity starts payments right after the annuity is funded. It is usually funded with a single premium, and is usually purchased by retirees with funds they have accumulated for retirement.

Deferred Annuities

With a deferred annuity, payouts begin many years after the annuity contract is issued. You can choose to take the scheduled payments either in a lump sum or as an annuity such as, regular annuity payments over some guaranteed period.

Deferred annuities are used as long-term investment vehicles by retirees and non-retirees alike. They are used to fund tax-deferred retirement plans and tax-sheltered annuities. They may be funded with a single or flexible premium.

Fixed Annuities

With a fixed annuity contract, the insurance company puts your funds into conservative fixed income investments such as bonds. Your principal is guaranteed and the insurance company gives you an interest rate that is guaranteed for a certain minimum period from a month to several years. This guaranteed interest rate is adjusted upwards or downwards at the end of the guarantee period. The fixed annuity contract is similar to a CD or a money market fund, depending on the length of the period during which interest is guaranteed. The fixed annuity is considered a low-risk investment vehicle. All fixed annuities also guarantee you a certain minimum rate of interest of 3 to 5% for the entirety of the contract.

The fixed annuity is a good choice for investors with a low risk tolerance and a short-term investing time horizon. The growth that will occur will be relatively low. Fixed annuity investors benefit if interest rates fall, but not if they rise.

Variable Annuities

The variable annuity, which is considered to carry with it higher risks than the fixed annuity. It is about the same risk level as a mutual fund investment and gives you the ability to choose how to allocate your money among several different managed funds.

There are usually three types of funds:

  1. Stocks
  2. Bonds
  3. Cash-equivalents

Unlike the fixed annuity, there are no guarantees of principal or interest. However, the variable annuity does benefit from tax deferral on the earnings.

For more additional information about Annuities, please contact us.

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