What Is Annuity Insurance? An annuity is an investment that pays a fixed amount during retirement; the exact amount to be paid depends on the annuitant’s age at retirement and the prevailing interest rate at the time of retirement. As such, when you purchase an annuity, it helps you to ensure a certain level of income during your retirement years. This in turn helps you to plan for your golden years, by saving up and spending only what amounts to a percentage of your future annuity income.
What Is Annuity Insurance? Annuity insurance policies pay fixed payments in the form of a lump sum. The annuitant receives a specified amount on a regular schedule from the insurer at the time of retirement. The present value of an annuity is simply the present value of future fixed payments, given at a specified rate of interest, or a discount annuity type. The higher the discount annuity type, the lesser the value of the annuity and vice versa.
How Is Annuity Payments Setting? Annuity payments are determined by a variety of factors including the applicant’s age at the time of application, rate of interest, tenure of investment, and the amount of insurance coverage provided. Other factors that affect annuity payments include the applicant’s choice of fixed annuity type, the amount of premium to be paid and the mode of payments to be made, like monthly, semi-annual or annual premiums. In addition, the annuitant may also choose to make some additional payments into the lump sum payment, which will be used to fund the cost of any medical expenses or long-term care expenses that may result from the annuity.
How are Cash Flows Determined? Annuity payments are determined by a combination of three factors: the Applicants’ age at the time of application, the starting rate of interest in the initial insurance company, and the number of years during which the annuitant receives payments. These three factors are applied to the Applicants’ life expectancy in order to determine cash flows. For example, if an applicant reaches the age of sixty-five at the time of application, the insurance company will expect that he will live to a certain age. This number is multiplied with the current age of the applicant in order to determine his expected lifetime income.
What Are the Benefits of Annuity Sales? The main benefit of annuities is their ability to provide a steady income throughout one’s lifetime. They also provide tax deferral benefits as well as flexibility of tax payment options. They also offer a secure way of funding medical costs or educational costs for the rest of one’s life. On a side note, as long as the payments are made on time and in full, it is possible that you will receive tax deferrable residual income from the annuity account.
What Are the Basics of a Fixed Payment Annuity? When comparing an annuity to a traditional savings account, it is important to know that both types of accounts use a fixed interest rate to calculate their respective payments. However, unlike savings accounts, a fixed payment annuity does not fluctuate based on the economy. In addition, unlike CDs, there is no minimum balance required, and no minimum withdrawal rate. The most notable advantage of a fixed annuity is that they provide higher returns than a proportionately lower rate variable annuity.