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If you’re looking for a reliable regular payout system to lean on and enjoy the peace of mind that you will always have an income source, an annuity may be a suitable option for you. An annuity can be best described as a contract sold by an insurance company to the annuity holder. This contract promises the annuity holder a future payout in regular installments—often monthly or for life. Put simply, the buyer (annuity holder) contributes money upfront and then receives payouts over some time as agreed in the contract.
Did you know that total annuity contract sales soared by 14% in the year 2018 reaching $232.1 Billion? The growing popularity of annuity is much because it can be personalized according to your needs. However, the flip side is that it can be overwhelming for potential annuitants to make an informed choice as to various features and options.
This is when you might want to schedule a consultation with our experienced and trusted advisor - American Financial Consulting. We can help you evaluate your options and choices and make the best decision. We work with transparency and in the best interest of our clients.
An annuity is a popular choice among policyholders for the wide range of benefits it offers. These include:
The three main types of annuities available are as follows:
As the name suggests, fixed annuity comes with a guaranteed and set rate of interest that doesn’t change beyond the contract terms. It is the option that has the most predictability and hence, least risky. Put simply, this type of annuity provides regular periodic payments to the annuity holder. However, it is essential to understand that the interest rate will change after a predetermined number of years (as mentioned in the annuity contract). Apart from that, a fixed annuity has a little higher return than a certificate of deposit offered by banks.
What makes variable annuity an attractive annuity type among annuitants is that it is rewarding. Nonetheless, the rate of interest of variable annuities is linked to the mutual funds you select. Moreover, the retirements payments are based on the performance of the mutual funds you choose for the sub-account. Hence, even though the results are rewarding, the risk is higher when compared to a fixed annuity. You can lose your invested money if there is a market dip and your mutual funds don’t perform as expected.
Also known as Equity-Indexed Annuity and fixed-indexed insurance products, it has the characteristics of both fixed and variable annuities. Hence, it balances risk and rewards. Compared to variable annuities, the risk is lower, while the income potential of an indexed annuity is higher than fixed annuities. The interest rate of an indexed annuity is tied to a market index like S&P 500.
Another crucial thing to note about an indexed annuity is that the rate may rise higher than the fixed annuity. Plus, it also has higher fees and costs compared to the fixed annuity.
As all three options come with pros and cons, it is vital to evaluate and compare your options to make the best choice. Our independent insurance agent will first understand your financial goals, requirements, and challenges and accordingly navigate you through the options with your best interest in consideration so that you can decide with sheer confidence.
Annuities offer two payout options. These are:
The best way to choose between the two is to be clear about your financial goals. If you want to start receiving payout right away, then immediate is a better choice. It is also known as Income Annuity. You will start receiving a payout within a year after you purchase it. The payouts on your investments are made every month if you select an immediate annuity.
If you want your payouts to start at some point in the future and not now, then deferred annuity is a feasible option. However, make sure to specify the date of payout in the contract. A deferred annuity works like a contract.
You can purchase it with one payment or several. Please note, if you make any payments, they will be structured in different ways. Compared to immediate annuity, deferred is preferred among investors because they use it to supplement their retirement income like social security. The investment grows on a tax-deferred basis.
Here is a quick comparison of the three types of annuities in a table format:
|Type of Annuity||Interest Rate||Risk Involved||Rewards|
|Fixed Annuity||It is based on the preset rate and guaranteed||Low Risk||It’s predictable|
|Variable Annuity||Tied to investment in your portfolio||Higher Risk||Possible higher or lower|
|Indexed Annuity||It is preset minimum and can change according to index like S&P 500||Medium Risk||The investment will not sink below the set level.|
Both policies, Indexed Universal Life Insurance policy and annuity contract, exhibit similarities and differences. To begin with, a life insurance policy like IUL seeks to offer the policyholder’s family a lump-sum fiscal payout if they die. However, an annuity contract serves as a safety net. It does this by offering policyholders a lifetime of a guaranteed stream of income.
Based on our wealth of industry experience and knowledge, our independent insurance agents have compiled the differences and similarities of annuity and IUL for your understanding.
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