An annuity can be defined as a contract that when entered into the value of the money appreciates and you get to receive annual payments from the same for a long time. Generally, annuities are created by people to safeguard their retirement cash inflow although you can also have an annuity for your child’s education, a trust or even making provision for a surviving spouse or children’s future. Though the an annuity is an investment it is not always suitable for everyone as it can’t be used as a short term money cash back kind of investments. The Internal Revenue Code (IRC) lays the basis of annuities while the different states govern them in accordance with the already laid basic laws. The state bodies regulate the companies offering annuities but you will also find a very strong non-governmental body that strives to keep the annuity arena in order, it’s called the Financial Industrial Regulation Authority (FINRA). Before you make an annuity investment you will need to talk to your account or a good financial advisor on whether you are fit to invest in annuities and if so the best type of annuity to take up.
There are several types of annuities that you can look into; they will include fixed annuities, variable annuities and equity-indexed annuities. All are good but for a person that doesn’t have the intimate current financial information and prowess the fixed annuity is the best option. We will try to understand it more here. The fixed annuity is usually a kind of investment the insurance company goes for the conservative kind of investments like the government bonds or corporate bonds. This also means that you won’t be involved in any investment decision that is taken regarding your money by the insurance company. It usually has two parts; the accumulation phase and the pay-out phase. The accumulation phase is whereby the investor pays in the premiums; the principal plus the interest literally increase. The pay-out phase is whereby payment is made be it partial, complete, on death or a guaranteed set of payments.
Since you take an annuity partly because of the interest income it would be good to check with an expert and help you calculate the rate that you are expecting. Insurance companies will offer high rates for the first few years; this is called the ‘bonus rate’. Later on the insurance might set the rate down but never below the minimum rate as stated in the contract. Though the insurance maybe earning more from the various bond investments they will only pay the stated rate and probably use the rest to attract new clients.
When submitting your premiums to the insurance company you will either be required to make a single lump sum premium and then wait for it to mature or you can be submitting a predetermined amount at specified set times or dates. The other method is to pay what you have and when you want.
Finally, you will either receive your annuity pay-outs immediately or over a short period of time depending on the type of fixed annuity you had.