An annuity is a financial product often issued by certain financial institutions in order to accumulate value over the time it is effective, after the specified date the instrument becomes payable, the institution then pays it out over a period of years, thus guaranteeing a reliable source of steady income. Annuity contracts are often strictly regulated by different jurisdictions which obviously vary form state to state within the US, in other parts of the world the terms, conditions and benefits vary as well.
There are many categories of annuities. They can be quickly classified as follows:
Fixed or variable Annuity : Fixed annuities are instruments which deliver a fixed payment amount throughout their valid agreement period, on the other hand variable annuities are equity-indexed instrument, due to its features it tends to look like a hybrid. It credits a minimum interest rate, just as a fixed annuity does, but its value is also dependent on the performance of a particular stock index which is calculated as a fraction of the index's return.
Deferred or immediate: A deferred annuity receives premiums and investment changes which are amassed for payout at a later time. Deferred annuity's payout time frame might be a very long time; for instance, deferred retirement annuities can remain in the deferred for decades.
An immediate annuity is designed to pay an income one time-period after the immediate annuity is bought. The time frame relies on how often the income should be paid. For instance, if the income is quarterly, the first payment comes four months after the immediate annuity instrument is purchased.
Fixed period, fixed amount, or lifetime: A fixed period annuity pays an income for a specified time frame, such as five, ten or even twenty years. A lifetime annuity provides what is called "guaranteed income" for the remainder or a person's life who is referred to as the annuitant.
Qualified or non qualified (Tax-wise): A qualified annuity is used to invest and distribute the funds in a tax-favored retirement plan such as an individual retirement account (IRA) or plans which follow the rules outlined in the internal revenue code sections 457. 401(k) and 403(b); on the other hand, non qualified annuities do not receive the tax benefit of qualified retirement plans.
Single premium or flexible premium: A single premium annuity is an annuity funded by a single payment. The payment could be invested to realize gains for a long time frame; a flexible premium annuity is an annuity that is intended to be funded by a series of payments.
The best way to choose the best annuity is to first figure out what you want and then try to match the benefits of different annuities to your need. This will help select the annuity that is best suited for your current and future financial situation taking in consideration all the benefits/disadvantages derived from it.
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