If you are searching for investment options to secure your financial future, one of the best strategies may be investing in annuities. The problem you may face is that unlike stocks or bonds, you have likely never heard of what an annuity is. Read on to find out the definition of this term and different types of annuities, which may be best for you:
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What is an Annuity?
An annuity is a contract, which is sold by an insurance company to an investor, promising to pay them a monthly, quarterly or annual fee from the date of the investment. This date is usually set to coincide with the retirement of the investor.
A contract outlining all the terms and conditions of the annuity is signed by the annuitant when establishing an annuity. The duration of the annuity and whether it is a fixed annuity or not, are parts of the terms included in the contract.
What are Different Types of Annuities?
Fixed Annuity
This is a contract made between an insurance company and an individual. The company will pay a fixed amount to the individual for the specified term, or the length of the contract. This payment will continue until the death of the individual.
It is a great tool for anyone seeking financial security in their senior years. If you’re interested in securing a worry-free future with a guaranteed income, besides any pension funds, whether government or private, you should consider a fixed annuity.
Fixed Deferred Annuity
A deferred annuity is an agreement between the insurer and annuitant to ensure the best return on the investment. Annuity holders gain interest on their deposited funds just like the owners of liquid accounts at banks and financial institutions. You can either make regular payments, or at-a-time investment to buy an annuity—the choice depends on your objectives and financial strength.
Once you retire from your job, your source of income becomes limited as pensions or social security payments may not be enough to cover your cost of living. A deferred annuity may be the perfect retirement strategy because you will get a return on your investment after retirement.
Immediate Annuity
Immediate annuity payments are purchased with a lump sum, called a premium. These can be advantageous for someone who has just received a large amount of money from winning the lottery, getting an inheritance, etc.
This type of annuity has a lower interest rate, and payments on annuities are made throughout one’s entire life or a specified period, about a month after the investment of the premium.
Life Annuity
This is a type of financial contract signed between the life insurance companies and the investor. With this contract, you are guaranteed a certain amount of money that will be paid to you by the insurance company throughout your lifetime in specified periods. Life term annuities can be paid to the spouse or the beneficiary if the original investor passes away.
Typically, the annuitant pays into the annuity on a periodic basis when he or she is still working. But, annuitants may also buy the annuity in a lump-sum purchase, usually at the time of retirement. Once funded and endorsed, the annuity makes periodic payouts to the annuitant, providing a dependable source of income.
Prescribed Annuity
Prescribed annuities are defined as Regulation 304 of The Income Tax Act (ITA), which offers a tax exemption as there is no tax levied on the return of capital. Most annuities are taxed on the amounts earned, higher in the beginner years, and more in the later years. This is a great strategy for tax deferral because this type of annuity is taxed over the entire sum over the lifetime of the account.
Cashable Annuity
This option is also known as a cash refund guarantee, which ensures that if the annuitant passes away on or after the payment date, a beneficiary will receive a lump sum payment. This payment is equal to the difference between the total payments made by the insurance company and the initial investment. Also, the insurance holder can cash out the annuity if they experience health problems or if the rates of interest are higher compared to the annuities that were bought.
There are many types of annuities, which all present different opportunities for investors. Simply do some research to figure out which one is right for you.
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