When it comes to investing, many people hear the word “annuity” and don’t know what is being discussed. If you’re one of these people left wondering, “What is an annuity?” you can relax. Annuities are actually easy to understand, especially when you can get some clear answers to your most basic questions.
The definition of “annuity”
An annuity is an investment vehicle between you and an insurance company. You agree to invest an amount of money; in return, they agree to provide you with different types and amounts of income, depending on the type of contract existing between both of you.
It can be helpful to think of an annuity as being similar to other types of investment vehicles. For instance, a CD is an investment vehicle between you and a bank, and a municipal bond is an investment vehicle between you and a municipality.
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Beyond the basic definition offered above, it will help you answer the question, “What is an annuity?” if you think about it in terms of its purpose. The purpose of an annuity is always income, whether you need money now or, in the future.
Under the umbrella of that broad purpose, each type of annuity provides income in different ways, and so has its own specific purpose. An immediate annuity is similar to a pension because it lets you invest a lump sum in exchange for income over the rest of your life. The added security is that it gives you a way to get the income you need knowing it will never run out.
A fixed annuity, which is similar to a CD, has a different purpose. You will get a fixed rate of income by agreeing to invest your money for a fixed amount of time. With a fixed annuity, your money will grow tax advantaged, because you won’t pay taxes on it while it’s growing.
A variable annuity, which is similar to mutual funds, is also tax deferred, but your money is directly in the market. This means you can trade within your variable annuity, but you can lose if the market falls. In addition, you’ll pay taxes when you take your money out if there are gains.
The indexed annuity is a hybrid between the variable and the fixed annuity. It gives you the market upside without the downside, but you don’t get all of the upside. If you want that, you have to invest in the market. But if you want more protection on your assets, the indexed annuity offers that.
Choose your annuity
Each of these annuities, depending on your particular situation can be right for you. Now that you have a better understanding what an annuity is, you can evaluate your circumstances and choose the one that you want to invest in. If you aren’t sure which one is for you, don’t hesitate to sign up now for the Senior Annuity Alert newsletter.