An annuity is basically a contract between you, the buyer, and an insurance firm in which you agree to pay a fixed amount of money, usually monthly, over a specified period of time and in return, you receive regular periodic disbursements. The annuitant is usually the person or entity on whose property the annuity is drawn; for example, an individual, a corporation, or a foundation. In some cases, private foundations award specific grants to worthy recipients. Annuities are used for many things such as paying insurance premiums, purchasing homes, and funding education. They can also be used to finance specific retirement plans or specific business goals, depending on the specific terms and structure of the annuity. You can use your annuity for retirement plans, to buy homes or real estate, or for any purpose that you see fit.
An annuity usually pays out once the annuitant reaches a certain age. This age is known as the annuity payout date. In general, the longer you have been working, the more you will earn in your payments, but the younger you are when you begin receiving payments on your annuity, the better your chances are of receiving a greater amount of money than what your original retirement plan provided. Some of the most common reasons that people withdraw money from their annuities is to purchase homes or vehicles, to take vacation trips, and to pay off loans and credit card debts.
Once an annuitant reaches the age of 65, their annuity payment will permanently cease. If you choose to convert it into a retirement annuity, you can extend your annuity payments, called deferrable annuities, up to the lifetime of your annuity (provided that it is a qualified retirement annuity). Deferrable annuities can increase your lifetime earnings potential, but they come with certain risks. The value of a deferrable annuity may drop if interest rates decrease, inflation increases, or if the company that holds the annuity observes a decrease in its assets.
Annuity payments are guaranteed by the insurance companies. In return for this guarantee, the insurance companies are allowed to charge a fee equal to the present value of the annuity on any withdrawal of payments. The present value of an annuity is determined according to several factors, including the rate of interest that you currently pay on your monthly bills, the current tax rate, and the life expectancy of the covered individual. In order to determine the present value, the value of the future payments is also used.
The duration of the guaranteed payments is called the present value of your annuity. The longer you live, the longer your payments will be. If you live past the guaranteed term, then your annuity will begin to lose value. Because the interest rates on these types of plans tend to be fairly stable, most of them pay out more than their coupon yields. Therefore, over time, they will be of less value than the yields you would receive if you invested the money in stocks, mutual funds, or other assets.
Many people choose to defer their annuity payments until they are in a healthier state, as they can then receive a higher amount. They then must invest the lump sum in order to receive a higher interest rate. In most cases, the higher interest rate received from a fixed annuity will offset the amount of additional interest paid during the deferred period. Deferring payments also helps the insured to avoid paying too much in taxes because the interest on the deferred payments will be exempt from income tax.