Annuities explained: What are annuities and what are the pros and cons of this financial contract?
Getting an explanation of annuities becomes necessary for people when they cannot understand what this financial contract really is. A contract through which an insurance company provides a steady stream of income in exchange for payments made by an individual is known as an annuity. The fact that even retirement income can be tapped through an annuity makes it even more attractive. Here we may not have the annuities explained in detail, but we do provide a brief overview.
When you must establish an annuity, you need to work with a company. The income beneficiary must make an installment investment or purchase an annuity with a lump sum. Unlike life insurance, an annuity does not require a physical exam. Instead of financing the children or partners of the income beneficiary, the beneficiaries themselves are financed during their life by the annuity. The beneficiary signs a contract that outlines all the terms of the annuity when establishing an annuity. The length of the annuity and whether or not it is a fixed annuity are among the terms included in the contract.
In a fixed annuity, to get as little risk as possible, people can opt for a fixed rate annuity. If they have a low tolerance for risk, then fixed annuities are the right choice, as they offer a guaranteed return on the first investment. However, in the case of market improvement, 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 well, you can make more money; however, when the market is weak, the payouts can be much lower.
People can seek the help of a financial planner to decide which option to select. There are many more pros and cons related to annuities, which need to be considered as well.
Pros – If by chance the owner of the contract dies while the contract is still active and the account value has been lost, the heirs of the contractor will inherit the full balance of the principal. Account performance doesn’t really matter, but the contract owner can set a predetermined level of future income. Regardless of the value of the account when the owners turn it in, they can still achieve a high contract value or recoup the primary investment. Contribution limits are offered for retirement plans.
Cons – General fees can rise to 3% or more, as many annuities have optional riders. Some products can prevent investors from choosing options, but most of them do not. There must be appropriate reasons if you decide to buy an annuity with high fees. Within an annuity, your asset allocation options are limited. Typically, a limited number of available mutual funds are listed, and some contracts contain predetermined portfolio balances.
Therefore, once annuities are explained, it is much easier for people to understand what this financial contractor is.