What Is An Annuity And How Does It Work?
Many types of accounts are available for consideration when planning for one's future or retirement. One such type of account is an annuity, which is an effective way to produce residual monthly income that will help supplement Social Security benefits or pension accounts. If you are wondering what is an annuity and how does it work, read on for a brief explanation.
An annuity is a savings vehicle offered through insurance companies by investment specialists. Investment specialists are often affiliated with banks and credit unions so they can offer financial products right at the institution for the customers' convenience. Even though they may be obtained at a financial institution, annuities are not insured through the Federal Deposit Insurance Corporation or the National Credit Union Administration. In fact, annuities are most often often through a company's insurance division.
There are two basic types of annuities: immediate and deferred. Immediate annuities are funded in one lump sum deposit and they start paying back the money to the investor right away in monthly installments. Deferred annuities are opened with a smaller deposit and they allow the investor to increase the balance by making regular contributions, usually on a monthly basis. The period of time that deposits are being made into the account is called the deferral phase. This gives way to the income phase, or the period of repayment to the investor. As with an immediate annuity, a deferred annuity pays monthly installment to the account owner during the income phase.
The interest earned on an annuity can be at a variable rate or fixed rate. Fixed rates often have a minimum amount that the interest will not fall below without actually guaranteeing a set rate of interest. Either payments are made for a predetermined amount of time or they can continue for the lifetime of the account owner. Lifetime annuities will keep paying monthly installments even if the account funds are exhausted, while annuities with a predetermined maturity date will not pay beyond that time.
Many people choose to transfer the balances of their 401K accounts into annuities when they retire. The monthly annuity installment payments take place of a person's paycheck, making the transition to retirement easy. There are also many tax benefits associated with annuities. To find the best account that is most beneficial to an individual's financial situation, it is advisable to seek professional help. Most financial planners and investment specialists offer free consultations with no obligations. They will review the person's current situation and future needs and direct him or her to the right vehicle to make retirement a more enjoyable time of life.