Tell Me in Simple Terms, What The Heck Annuities Are!

 

 

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What is an Annuity?

An annuity is a contract between an insurance or investment company and you (policy holder). Usually, you need to invest a minimum of $5000. In return, the company is committed to growing that amount for an X number of years and until you start receiving monthly payments.

 

My annuity: I have an annuity and I am supposed to start receiving payments at age 55. This means that the money I invested is being used to play the S&P 500 Index (stock market). The amount I invested (the principal) will always be intact. However, when I reach the age of 55, I will start receiving monthly payments based on the growth of my money since I signed that contract in 2011.

 

Now, let’s not fool ourselves. The insurance company is making a great amount of money with YOUR funds too. However, annuities are smart vehicles if you are serious about funding your retirement. Remember: You have the right to ask your broker:

 

  • What type of commission he/she is making
  • Ensure that your principal is always intact, meaning, even if the stock market goes down, you will not lose any money. You want to see that in the contract.
  • Ensure that you ALWAYS have a beneficiary. If not, in case of death, YOUr hard-earned money will go to the state.

 

Here’s a quick table regarding the different types of annuities so you can make smart choices.

 

Immediate
Deferred
Fixed
Variable
Single Premium
Multiple Premium
Single Owner
Jointly Owned
This annuity will start paying you right away, the investment is more aggressive, but it is also most costly.
Great for retirement. The company will invest your money for a while (will use it to play in the stock market) until you start receiving payments at a certain age – just like in my real-life example above.
 
The income you receive per month will never vary.
Your monthly payment will be based on the performance of the stock market.
Investing your money as a lump sum. 
Investing your money by making payments. Let’s say you want to invest $20,000. You can make 20 payments of $1,000 until you reach the overall agreed amount.
When you purchase an individual annuity for you and you only.  
Couples often buy joint annuities so that when one partner dies, the other will continue receiving payments until both partners have passed away.
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