What Exactly Is an Annuity?
An annuity mitigates the risk that you will outlive your savings or that a financial collapse will devalue them.
You invest a lump sum in exchange for monthly payments over a long period. You will continue to receive income regardless of how long you live.
An annuity is an insurance company contract. Insurance products are intended to mitigate risk. Flood insurance, for example, reduces the likelihood that a homeowner will incur high costs if a pipe bursts or a roof leaks.
The insurance company accepts the risk of making payouts that exceed the value of its clients’ savings.
What You’ll Discover in This Guide
In this guide, we’ll look at the benefits and drawbacks of annuities.
We’ll go over the options and values and explain what you need to know if you’re thinking about using this financial tool to secure your future.
While all annuities exchange a customer’s payments for a future return, annuities come in a variety of forms.
In addition to being deferred or automatic, they can also be variable or fixed, limited or set for life.
Their values change over time, and the rates they offer to customers can differ between insurance companies.
As you consider adding an annuity to your financial toolbox, we’ll provide you with the information you need to determine whether this tool is right for you and which type of annuity is best for you.
An Introduction to Annuities
Before we get too far ahead of ourselves, let us first define an annuity. It’s an insurance product, believe it or not. It’s a contract between you, the annuitant, and an insurance company in which you make a single or series of payments known as premiums.
In exchange, you will receive regular payments that will begin either immediately or later. That may sound perplexing.
That is to be expected. After all, annuities can be extremely complicated.
So, the simplest example of an annuity is when you buy travel insurance or a warranty on a new vehicle. They provide coverage if your trip is canceled or your car breaks down. Annuities ensure that you will receive a consistent income for the rest of your life. As a result, annuities are frequently used to save for retirement.
You are essentially paying an insurance company to grow your money when you choose this option. More importantly, when you retire, they will send you payments.