Financial Freedom

Annuities Explained – What Are Annuities and What Are the Pros and Cons of This Financial Contract?


Getting annuities explained becomes necessary for people when they are not able to understand what this financial contract actually is. A contract through which a consistent stream of income is provided by an insurance company in return for the payments made by an individual is known as an annuity. The fact that even retirement income can be availed through an annuity makes it even more attractive. Here we might not have annuities explained in detail, but we offer a brief overview.

When an annuity has to be set up, working with a firm becomes necessary. Either an investment in installments has to be made by the annuitant, or an annuity has to be purchased with a lump sum. Unlike life insurance, no physical examination is required by an annuity. Rather than funding the children or partners of the annuitant, the annuitants themselves are funded during their lifetime by the annuity. A contract outlining all the terms 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 among the terms that are included in the contract.

In a fixed annuity, to get the lowest risk possible people can go for a fixed rate annuity. If they have a low tolerance for risk, then fixed annuities is the right choice since a guaranteed return on the first investment is offered. However, in the case of the improvement of the market, the annuity payments are not affected.

In a variable annuity, the performance of the investment determines the payment that will be received from the annuity. When the market is doing good then more money can be made, however, when the market is weak, the payments can be much smaller.

People can seek the assistance of a financial planner to decide which option they should be selecting. There are a lot more pros and cons related to annuities, which also need to be considered.

Pros – If by chance the owner of the contract passes away while the contract is still active while the account value has been lost, then the heirs of the contractor get to inherit the complete principal balance. The account performance does not really matter, but the contract owner is allowed to lock in a future income predetermined level. Regardless of the value of the account when the owners surrender it, they can still achieve a high contract value or recover the principal investment. Contributed limits are offered on retirement plans.

Cons – The overall fees can be pushed to 3% or more since a lot of annuities have optional riders. Some products might prevent investors from electing out of the options but most of them do not. There should be appropriate reasons if you decide to buy an annuity with high fees. Within an annuity, the options of asset allocation are limited. A limited number of available mutual funds is usually listed and predetermined portfolio balances are contained within some contracts.

Thus, with annuities explained, people find it a lot easier to understand what this financial contractor is.


Source by Saad Naveed Bari

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