The concept of an annuity is simple; you give an insurance company a lump sum of money and they guarantee you an income for a period of time. While Annuities seem to have fallen out of favour in the last number of years, that doesn’t mean they can’t be a valuable retirement planning tool. Investors often avoid their finality as once you give the insurance company your money, you are often times locked into the contract. That might sound daunting, but annuities are one of the best tools available to combat the risk of outliving your money.
The specifics of annuity can be complicated. There are a variety of types of annuities available and they all serve different purposes. Below are three common types of annuities and how they can be best utilized.
1. Term Certain or Fixed Annuities
A fixed annuity is one that pays out for a pre-determined amount of time. A purchaser would instruct the insurance company as to how long they would like to receive payments and the amount of money they have to invest in the annuity. The insurance company would then offer an income payment and if accepted, the purchaser would receive that income until the end of the term. Once the term ends, the payments cease. This annuity would be suitable for someone who needs a guaranteed income for a fixed amount of time. If the purchaser were to die before the period ends, the remaining money would be paid to beneficiaries.
2. Guaranteed Life Annuities
Annuities provide a guaranteed stream of income for as long as the purchaser lives. These annuities can be purchased as either single life or joint life. A single life annuity would pay an income until the purchaser dies. A joint life annuity would pay as long as one of the two joint life annuitants is alive. It is very possible that an annuitant may outlive the capital that they paid to the insurance company when they purchased the annuity, but the insurance company is obligated to pay out regardless. This is a great tool for someone who is worried about outliving their funds.
3. Variable Annuities
A variable annuity is one where an insurance company invests your money in product with a variable return. The annuitant receives a fixed income as well as a variable income. The variable income depends on how the investments perform. You earn more money if the investments perform well or less if it does poorly. These annuities may not be suited to someone who is looking for a guaranteed income stream.
Annuities can be a great planning tool for the right person. If you are concerned about outliving your money or do not want the stress of a fluctuating income, an annuity may offer the solution.