Annuity and Its Types
Often you have come across this term ‘Annuity’. Have you ever bothered to know what it means? Well, we will explain it here.
What is an Annuity?
Simply put, an Annuity is a contract by an insurance company that pays you an income regularly in future for which you pay the premium(s) now. This is some kind of ‘retirement income’ in return for the small premiums paid by you now. It will pay an income for you as long as you live!
The meaning of Annuity in itself is ‘Income’, derived from a Latin word. However, you should not confuse the term with a Life Insurance Policy or a Health Insurance Policy, since they are different. It is also not something similar to a ‘Savings Certificate’. Buying an annuity is not suitable for attaining short-term financial goals either.
Types of Annuity:
There are two types of annuity available. They are Fixed Annuity and Variable Annuity. The former involves earning a minimum guaranteed rate of interest for your premium. On the other hand, in the latter, the premiums paid by you can vary which involves some risk.
In a Deferred (paid later) Fixed Annuity, the income is guaranteed, and the rates of interest can either be a current interest rate or a minimum guaranteed interest rate. The latter means the lowest rate your premiums will earn, as stated in the contract. The current rate is linked to the reserves and to the interest the company earns on their portfolio, or for an external reference or index.
If you buy a fixed deferred annuity, you can even start earning your interest income in the next month. However, it is often suggested by experts to wait for a minimum of 12 months, and take the interest earned in the previous year through the next year.
You can put your individual retirement account into a fixed annuity with an IRA. This ensures a guaranteed retirement income which can last as long as you live. Insurance companies will preserve the reserves, as they are required by law to back up the guarantee. Please browse through www.WhatAnnuity.com website for more details.
