Are you considering purchasing an annuity?  If so, here are the basics.  I encourage you to fully educate yourself when it comes to annuities.   Like most financial instruments, they can be useful tools, if used properly.

What is an annuity?

An annuity is a contract that makes payments to you at regular intervals based on purchase payments that you pay for the contract.  The main reason to buy an annuity contract is to obtain an income, usually for retirement purposes.  You can buy annuity contracts from life insurance and other financial services companies.

The 3 main types of fixed annuities are:

• A traditional fixed annuity offers the stability of a fixed interest rate that is determined by the company and is guaranteed never to be below a minimum interest rate.  These are also referred to as CD Annuities.
• A fixed-indexed annuity is a variation of a traditional fixed annuity, and gives you the opportunity to earn interest at an interest rate that is determined according to a formula based, in part, on the change of a referenced index, such as the S&P 500.  These annuities are guaranteed not to lose your principal amount.
• An immediate annuity is an annuity that can give you access to a stream of income immediately after you purchase it.

Annuity income payments are often made monthly, although other frequencies are available.

Are there charges that will affect the value of my annuity?

There are no up-front sales charges or administrative fees.  If you withdraw all or part of your annuity, you may incur an early withdrawal charge. This charge is usually a percentage of the value of the contract, or of purchase payments paid, and takes effect if you withdraw the full or partial value of the contract. The percentage may be reduced or eliminated after the contract has been in force for a certain number of years.

How much income will I receive from my annuity?

• The amount of each annuity payment is determined when payments begin. Annuity payments are based on both the value of the contract and the contract’s annuity purchase rate when the annuity payments start. The annuity purchase rate depends on your age, gender and the annuity payment option you have chosen.

How long will I continue to receive annuity payments?

The length of time over which annuity payments are made depends on the annuity payment option you choose. The most commonly available annuity payment options are:

• Income for a fixed period–you choose the length of time to receive payments.
• Life annuity with payments for at least a fixed period– receive payments for the rest of your life with payments guaranteed for a specified period of time.
• Joint and one-half survivor–receive payments for the rest of your life. Your surviving joint annuitant then receives 50% of the original payment amount for the remainder of his or her life.
• Income for a fixed period, not to exceed life expectancy (where available)–receive monthly payments based on your life expectancy.

Are there other benefits with an annuity contract?

Death benefit

Most contracts provide that if you die before the annuity payments start, the contract value will be paid to your beneficiary. Some contracts provide that the death benefit will be the total purchase payments paid if that amount is greater than the value of the contract at death.

Withdrawal & surrender benefit

Most annuity contracts allow you to surrender your contract if annuity payments to you have not yet started. Upon surrender, the contract terminates. The surrender benefit is equal to your contract value, less surrender charges, if any. Most annuity contracts also provide that you may withdraw a portion of your contract value, under certain conditions, without terminating the contract. A surrender (or early withdrawal) charge may be deducted from the amount withdrawn.

Related posts:

1. How To Increase Your Yield by 45% With Tax-Deferred Annuities
2. How to Guarantee Your Lifetime Income – Retirement Income
3. Life Insurance Basics
4. 7 Questions to Ask Before Buying An Annuity