An explanation of immediate annuities
So you decided to take matters into your own hands and take a policy to secure your financial situation in the future. But one problem is bothering you. What kind of annuity are you going to get? There are several types in the market. You can either choose from immediate or deferred. The former is further categorized as either fixed or variable. Sounds very confusing? To help you understand, here are some factors to consider. Choose the right policy for you depending on your needs.
Gathering from the name itself, immediate annuities starts to pay you right away. It is a contract of period certain and lifetime payments by the insurance company to the policy owner that starts from the signing of the contract. It is very beneficial for the people with short amount of time to wait in receiving payment due them. This is also advisable for people already in the retirement. Unlike in deferred policy where you have to wait years before you can get your payout. But should you decide to change from deferred into immediate, you can do so by consulting your financial planner.
Earlier I mentioned fixed immediate and variable immediate types. What are their differences? The former is considered to be the typical class of policy. Here you start to receive payouts after the first month of your investment thus returning your money right away. You can choose the mode of payment you want either be monthly, quarterly, semi-annually or annually. The different factors of your investment will depend on how much is your payout such as interest rate, the size of your investment, mode of payment, contract period among others. This is quite different from a deferred policy where you can begin an income stream after 1 or more years of deferral. The larger the investment with shorter payout period will definitely yield higher monthly payouts than others. This policy is ideal for investors with at least 5 years investment plans. For instance, if you are about to retire in say, 5 years or so years, and have considerable amount saved for retirement. The bank is limited to a bank rate interest income for your deposit which could possibly be around 1% or 2% per annum, but an annuity policy may be able to give you as much as 6% per annum interest income with safety of principle comparable to having your money deposited in the bank*. The second type is variable immediate investment. It may help in times of inflation because the account grows along with the stock market. Here, your money is actually deposited to different income earning investments depending on the risk you are willing to take. However, the market investment can easily move up and down, and it is possible to lose money in this type of investment. A good financial planner can help you chose the appropriate sub-accounts and invest your money wisely.
*Unlike bank products, annuities are not FDIC insured.
Annuities are best suited for long term investors. Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax. Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time. Any guarantees on principal invested are based upon the claims paying ability of the underlying insurance company.