Annuities are interest-bearing financial contracts that give you tax-deferred growth on the money that you have invested. They are sold by insurance companies that will promise to provide you with income on a predetermined future date, usually by the time you retire or when you reach a specific age. Annuities come in a variety of types to better suit the different financial needs of each individual.
There are two major types of annuity available for investors to choose – fixed annuity and variable annuity. Fixed annuities are considered to be conservative and low-risk types of investments. They appeal to a lot of investors especially those who are seeking for a secure way to save their hard earned money and will receive a stable flow of income in the future. The money invested in this type of annuity will grow on a fixed rate for an initial period. After that, the insurance company will be declaring new interest rates periodically. Fixed annuities offer a minimum interest rate, regardless of the condition of the financial market.
On the other hand, a variable annuity is similar to mutual funds. Variable annuities will allow you to invest your money into sub accounts that are tied to the stock market. The rate of return will vary according to the performance of the selected investment. Unlike fixed annuities where the amount you will receive is fixed, a variable annuity may offer you higher payments if the investment you have chosen does well. Since the returns will depend upon how the investments perform, this annuity type will suit those types of investors who will not be in need of the money from the annuity for a long period of time.
Both annuities can come with a lifetime benefit. This means that you will be receiving income from the annuity until the day you die or your spouse will continue receiving income until they die, in the case of a joint annuity. If ever you already own an annuity but are in need of immediate income and can no longer wait for the annuity payments, you can decide to sell annuity payments in exchange for a lump sum amount of cash. This is usually the choice of those annuity owners who need a huge amount of money for emergencies like paying off bills or debts.