As an investment product, an annuity is a financial instrument that pays out a sum of money to its owner over the course of a number of yrs. If you have an annuity, you’re guaranteed at least a certain amount of money every year until the annuity expires or you become deceased. This amount is a payment plus interest, which can accrue at different rates.
The interest rate you earn depends on the type of annuity you have. The most popular types are:
You can also choose between different types of annuities:
You can buy an annuity by spending a lump sum up front, then after a certain amount of time you’ll receive a percentage of that money back each yr, plus interest.
Annuities are a steady stream of income, but they often have lower returns than other investment tools. It’s possible to beat the guarantee, but not every annuity performs the same way. Still annuities are useful as an investment tool if there’s a market downturn but you continue to receive the same interest rate.
The amount you pay to purchase an annuity is calculated by a mortality table developed by the annuity company. The table determines what it’ll cost the company to pay you over a period of time, or how much risk you pose to the company that you’ll live so long that the company will start to lose money on your investment.
If your beneficiary chooses to receive the death benefit as an annuity, that means he or she wants to divide up the payments across a number of yrs of his choosing, instead of receiving a lump sum of money, the beneficiary can choose to turn the death benefit into annuity by using the lump sum to purchase the annuity, or what’s called annuitization.
Purchasing a life insurance annuity is less popular than simply accepting a lump sum, as there’s not a huge advantage to choosing such deferred payments when the lump sum is tax-free. (Annuity payments are also tax-free) But you may want to choose to receive the death benefit as an annuity if you have fewer expenses, such as when you’re older and retired. A life insurance annuity if you have fewer expenses, such as when you’re older and retired. A life insurance annuity may also be a good idea if you’re bad with money and need to restrain your spending.
The annuity is a guaranteed amount paid out by the life insurance company. If you elect to receive an annuity, the combined annuity payments may actually be worth more than the lump sum if the annuity owner lives a long time, essentially beating the mortality table’s predictions. Beneficiaries often elect to receive an annuity that pays out the rest of their life.
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