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What is Annuity and Everything You Need to Know About It

May 18, 2022 11:18 AM

The concept of an annuity is mostly chained to a pension. However, it is important to know that an annuity and pension are two different financial products. It is rightly understood that an annuity pension is paid out and therefore qualifies as an instance of an annuity.

There are many options available in the market for individuals looking to plan for retirement. An annuity is one of them. It is one of the insurance products that pay out regular income. 

What Is Annuity?

An annuity is a long-term investment agreement between the policyholder and insurance provider in which the policyholder makes payment in a lump sum or series. In return, the policyholder gets periodic payouts, either immediately or in the future.

An annuity is the most certain thing that you can rely on, as it provides a guaranteed return in the senior years of your life. Buying an annuity is considered to be one of the most common ways to finance retirement expenses. Moreover, an annuity is not an investment alternative, it is mostly considered a form of insurance. In simple words, an annuity is a chain of periodic payments which are made from time to time from a lump sum corpus. 

Why Should You Buy An Annuity Plan?

Retirement is a stage that comes in every working person’s life, raising anxiety in terms of income and maintaining a lifestyle. An individual’s source of income may no longer be there at the time of retirement. At such time, an annuity plan ensures that you continue receiving a regular flow of income after your retirement. After working hard for a major part of your life, retirement is a well-deserved time. An annuity plan also allows you to be financially independent. You can also use other retirement investments to get tax advantages, such as 401k

What Is a 401k Plan?

A 401k plan is one type of retirement savings plan that has tax advantages for the saver. A 401k plan is a retirement account that the company sponsors. The employees can contribute income to the account. 

Types Of Annuities That You Should Know About

There are several types of annuities provided by insurance providers. Each type of annuity has its payout potential. You can choose when you want to start receiving annuity benefits and how you would like your annuity to grow.

Listed below are the key types of Annuities.

 Immediate Annuity

An immediate annuity refers to the annuity in which the premium is paid in a lump sum and not multiple numbers of times. The policyholder will receive a guaranteed payout at regular intervals with the immediate annuity contract. 

Deferred Annuity

A deferred annuity is very different from an immediate annuity. In a deferred annuity, an individual would be required to build a corpus which is used to buy an annuity when retiring. Most of the insurance providers permit the bit across a pension plan. When the time period of the pension plan ends, an individual may buy the annuity with the money accumulated. 

Fixed Annuity

In a fixed annuity, the payout will be the same throughout the payment time frame. The fixed annuity is the choice of a moderate traditionalist as they generally put resources into fixed income products. From multiple points of view, a fixed annuity is ideal as a benefit payout because it makes sure the income is provided to an individual after retirement. 

Variable Annuity

A variable annuity provides you with periodic payments based on the performance of sub-accounts that fund the annuity’s growth. So, there is a chance that your payment may fluctuate. The subaccounts work in a similar way to mutual funds. The payment amount can be higher if the sub-accounts perform well, or it can also be smaller if the sub-accounts lose value. 

MYGA – Multi-Year Guaranteed Annuity

A multi-year guaranteed annuity is a type of fixed annuity that offers a fixed interest rate for a specific period of time. This type of annuity is generally best suited for people nearing retirement and looking for a way to defer taxes while guaranteeing a return on their investment. 

Choose The Right Type Of Annuity For You

There are many types of annuities available, and each type has its pros and cons. You should study the features of different types of annuities that can meet your current financial situation. Also, you should consider the type of annuity which can help you reach your long-term financial goals.

 You should also compare different annuity options and see how each meets your needs. It is mostly advisable to speak with a financial professional about how each annuity you are considering will help you achieve your goals. 

Conclusion

No matter which annuity plan you choose, there is no limit on the amount that you need to invest in it. You should always consider your financial needs, current savings, and the impact of inflation before purchasing any product.

 

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