The question “What is annuity” can only be answered by taking a look at the details of what the topic stands for. You need to be properly informed in order to benefit a lot from the subject matter.
In a layman’s language, annuity refers to a contract you sign with an insurance company with the view of meeting your retirement needs. It can also be for the need of other long-range goals which you may have. Usually, you’re required to make a lump-sum payment. You may also be required to pay series of payment depending on the conditions on ground. In return to your investment, the insurance company agrees to pay you the dividends or income at an agreed date. The income payments may be made monthly, yearly, or at a future date which you’ll agree upon.
Annuities are mainly of 3 types namely, indexed, variable and fixed annuity. You need to explore these types in order to know which one to invest in. In a fixed annuity, your insurer agrees to pay you no less than specified rates of interest during the period when your account is still on. You’ll enter into agreement with the insurance company to pay you a specified amount on a fixed date. In most cases, the fixed date may be in 10 to 20 years time. It can also be a lifetime stuff that may even be transferred to your beneficiary when you die.
Indexed annuity has a unique feature as well. Your insurer will credit you with the return that is solely based on various changes showing on an index. In most cases, the contract value in indexed annuity is usually less than a specified minimum irrespective of the performance of the index.
Variable annuity on its own also has its special feature. You simply choose to invest on a variety of options such as bonds, stocks and mutual funds. Your insurer will then be paying you according to the performance of your investments. Payments may be made monthly or at a future date. You can decide to go for immediate variable annuity or deferred variable annuity. You get immediate monthly payments when you go for immediate variable annuity while you get payments at a deferred longtime date when you go for deferred variable annuity.
In most cases, SEC regulates variable annuities as securities. Indexed annuities may or may not be regulated securities since many of them are not registered with SEC. The same scenario applies to fixed annuities. They are not registered with SEC and hence can’t be regulated.
In any case, what is annuity as seen above is all about knowing the details of the various annuity types involved. You don’t need to jump into signing any contract with any insurance company you see. There’s always the need to make proper inquiries about what is annuity and how various insurance companies offer it. This will help you to make the right choice when you decide to invest into annuities.