Annuities for Dummies

Okay, so we’re not calling you a dummy. But we thought we’d follow along with the popular name of the guides that are often so helpful to those who are newcomers to any topic.

Annuities can be a complex and confusing topic for many people, but in this annuities for dummies guide, the hope is that the key points of this type of investment account are made clear. The basics of what annuities are and how they operate are relatively simple. It is only when one begins to get deeper into the types of annuities and different options that things start to get a little sticky.

What is an Annuity?

An annuity is simply an investment contract between an individual and an insurance company that is designed to provide a source of income throughout the individual’s retirement years. It is not life insurance and should not be substituted for such. Annuities do have certain benefits over other types of retirement accounts as they tend to be more flexible in their contributions, withdrawal, and taxes. However, annuities are not always for everyone and great care should be taken when planning for one’s retirement.

Types of Annuities for Dummies

The types of available annuities include fixed, variable, fixed indexed, enhanced, and immediate and deferred annuities. Fixed annuities are the lowest risk, but also offer the lowest earning potential of all annuities. With this option, the investor is guaranteed a set interest rate based on the market index at the time the contract is made. While this rate will never decrease due to market fluctuations, it will also never increase over the life of the contract. This means that if the market has a significant increase in rates, the investor will not be able to take advantage of the higher earning potential.

Variable annuities are at the other end of the spectrum. They allow the investor to earn whatever the market is earning at the time. While this greatly increases the earning power of the contract, it also sets the investor up for the greatest risk. If interest rates decrease to a certain level, the fees involved with managing the account may be greater than the total earnings for the year, which will cause a loss of principal.

Fixed indexed annuities are something of a middle ground between the two types above. They offer the security of principal while allowing the account to earn interest based on a percentage of the market index value. This increases the earning potential without risking the loss of principal.

Enhanced annuities are plans that consider any medical illnesses or disabilities when calculating the total monthly payment. Since life expectancy of these individuals is calculated to be shorter, logic says that their payments should be higher so as to see the full return of their investment.

Immediate payment annuities are those that begin paying out immediately after the contract is made. These are usually pension annuities. Deferred annuities go through a set earning period before transitioning to the payout phase, offering a greater earning potential to the investor. Of course, these descriptions are the most basic of annuities for dummies and one should seek professional counsel before deciding whether or not an annuity is right for them.

Now that you have a basic understanding of annuities, keep reading! The rest of our lump sum annuity site is packed with valuable information that will give you the information you need to make the right decisions.