What Is An Annuity?
There are all sorts of investments types out there that people are not aware of. Yes, everyone knows the more famous markets of stocks, bonds, mutual funds and real estate, but there are certain ways of investing that are not that popular among the average citizen. Why? I do not know, but let me explain to you what I do know. One of these "less known" ways of investing is the creating of annuities
First of all, what is an annuity? Annuities were designed to be a reliable source of securing a steady cash flow. Especially for people entering their retirement. Pretty much, you give a lump sum of money to a life insurance or investment company, which in turn will give you a steady cash flow. This could last for the rest of your life. Yes, for the rest of your life. Kind of a good deal right?
Who Can Buy An Annuity?
Who can buy these annuities? Anyone can. Annuities are often purchased by people who have just received a large sum of money in the form of a trust fund or gift money. Rather then blowing it all on materialistic things, they exchange a certain amount for a secured cash flow income for the rest of their lives. Pensions and Social Security are two other examples of lifetime guaranteed annuities that pay retirees a steady cash flow until their death.
One of the criticisms of annuities is that they are not liquid. When you deposit money into an annuity they are usually locked up for a period of time between 2 and 10 years on average. This is known as the surrender period. If the annuitant touches that money during the surrender period there will be a penalty fee required.
There are two types of annuities, fixed and variable. Variable annuities have some market risk, but you can add additional features on your contract that can change them into some sort of hybrid fixed-variable annuity. Pretty much what happens is, when there is upside portfolio potential, you benefit from it. While there is a protection of a guaranteed lifetime minimum withdrawal benefit if the portfolio ends up dropping in value.
The issue with annuities is though that there is a longevity risk to it. One can outlive their initial investment. If one already has a life insurance policy there is a way they can be exchanged through a 1035 exchange. This allows a transition without any tax interference.
This is just one more type of investment that is out there which might interest you. There are many variables that can influence an annuity experience. The surrender period, initial investment amount which will influence your monthly/yearly cash flow amount.
For More Info.
Always consult with an accountant, financial expert or banker before taking any steps towards investing your money based on this post. This is not advice nor an expert opinion, simply a post to create awareness of more investment opportunities which could result in long time profitability if done correctly.
For more information about annuities consult with your banker, broker, life insurance specialist or financial expert.