An investor looking for a place to put his money with the hope of getting returns would ask, what is annuity? This is a valid question, and the answer is – it is an investment tool in which an individual could sign a contract with an insurance company in which they will pay an amount with the hope of returns starting immediately or in some time in the future.
There are various types of annuities, and an investor who inquires what is annuity may want to familiarize themselves with these as well. One of the major types of annuity is known as a fixed equity index annuity, and many retirees are opting for this.
An indexed annuity is usually linked to the rate of a particular index, and the payments in such an annuity usually depend on the performance of this index. The investor who inquired what is annuity may want to know how a fixed equity indexed annuity works, and the explanation for this is that when the index’s value rises, the investor will get a higher pay, but there is a guaranteed minimum that the investor will always get, even if the index falls.
An insurance company will purchase stocks in a company in a specific index which will be tracked for a year. At the end, in case the index has risen from where it was at the time of purchase, the investment is cashed and the returns will increase the value of indexed annuity. At this point, the investor will purchase stock again in preparation for another year. If this is not the case, then the investment is not cashed out and no interest is accumulated for that particular year.
An individual inquiring what is annuity may also want to be advised that like all other types of annuity, a fixed indexed annuity does not accumulate any task before withdrawal. This is good news for the investor, as they will not pay the federal government taxes on this investment until they start withdrawing, after which they will pay an income tax.
This option is quite advantageous in that there is the possibility of profit, but no possibility of losses as there is a guaranteed minimum that the individual is paid. When entering into the agreement with the insurance company, the investor will have to state the total amount of time in which their money will be invested, and the total amount of time in years that they expect to receive their payout.
The investor will choose to either withdraw all their money at once during the payout phase, or choose to get monthly payments for the agreed amount of time. This type of annuity is best for people who do not want to be paid immediately, and who have some time before they retire as the money needs time to grow. It is a good planning tool for individuals who would like to have a secure retirement period without necessarily worrying about where funds will come from, and the individual who also has a long-term goal and will therefore require the money in a certain number of years.