An annuity is a contract between the individual purchasing the annuity (the owner) and an insurance company. The basic terms of an annuity contract states that in return for a sum of money (the premium), the insurance company makes certain guarantees to the purchaser. Examples of the guarantees that the insurance company may offer the annuity purchaser are:
Many terms of annuities are stated in insurance law and will be the same with all contracts. Other contract features are determined solely by the insurance company offering the product. These features will vary from annuity to annuity.
BestVest offers many annuities from many carefully chosen product providers. Talk with your BestVest financial consultant to determine if an annuity is the right investment for you.
History of Annuities
Annuities were first sold in Scotland in the early nineteenth century and had come to America by the end of the 1800’s. The initial goal for annuities was to provide a convenient manner of distributing the funds paid by life insurance policies.
As an example, if one’s spouse died but left a life insurance settlement for his or her spouse, an annuity could be utilized in order to guarantee that a livable income would be given to the recipient for the remainder of his or her life, regardless on how long one lived. Today, annuities remain the only investment that can guarantee a lifetime of income to the recipient.
Annuities in Everyday Life
While annuities might seem a bit unusual, they’re actually very common. For instance, when a person retires, the corporation they worked for purchases an annuity to support the pension payments. Also, when a person wins a lottery award to be paid over the course of twenty years, the lottery buys an annuity to fund the payments.
Tax-deferred annuities are offered by insurance companies. Such annuities are non-negotiable, interest-bearing instruments with two distinctive phases: the accumulation phase and the payout phase.
In the accumulation phase, interest is retained in the account and the overall account balance grows. During the payout or annuitization phase, the funds in the account are distributed to the recipient in various ways depending on the terms of the annuity.
Types of Annuities
There are three main ways to distinguish between annuities:
All annuities combine these aspects in different ways.
One differing characteristic of an annuity is when the annuity payments start. If payments begin within one to three months after the annuity is purchased, then it is considered an immediate annuity. Payments are generally made monthly, but insurers also allow quarterly, semiannual, or annual payments. Immediate annuities are generally designed for individuals who need an immediate stream of income. Deferred annuities delay payments until some point in the future; this point is determined by the specific terms of the contract.
A single-premium annuity is bought with a single payment. There are no additional premium payments. All immediate annuities are purchased with a single-premium. A flexible-premium annuity is bought using an initial minimum payment. Afterwards, the owner may make additional payments of a certain minimum amount. This premium payment plan is designed for people who want to gradually create and grow their annuities.
Fixed Annuities vs. Variable Annuities
A final distinction between annuities is how they grow in value. Fixed annuities give a guaranteed minimum fixed rate of return. Fixed annuities may guarantee a higher rate for a period of time, and at the end of that period, the contract may assure a different rate of return for another certain period of time. Such annuities are guaranteed contracts; the insurance company guarantees that it will execute all of its obligations for the annuity owner. This guarantee is backed by the full faith and credit of the insurance company offering the annuity, but there is no government guarantee associated with annuities.
You should consider a variable annuity’s risks, charges, and expenses carefully before investing. Contact your Financial Advisor to request a prospectus, which contains this and other information about a specific variable annuity. Read it carefully before you invest.