An Annuity Buyers Tutorial For The Typical Annuity Buyer
So you've heard about the world of annuities and you are ready to jump right in. Your uncle has already given his stern warning about how annuities are designed to take your money and you would be much better off investing your money elsewhere. In his mind, investing in his MLM chain would provide you much better prospects for the future. Despite his warnings you are ready to become an annuity buyer.
Rather than concern yourself over other people's perception of annuities, it is important for you to find out the details yourself. Sure, annuities can have their problems, and uneducated individuals may be persuaded to purchase annuities when they don't fit their circumstances. But let's face it, this is the case with almost any financial product. You must determine the suitability of the product to your needs before you jump in.
Should The Buyer Of Annuity Products Expect Different Options?
If you are considering making the leap to annuity buyer, you must be prepared to learn the basics of annuities. Beyond determining the ins and outs of how an annuity works (see The Annuity Buyers Guide section), it is important for you to recognize that there are several different types of annuity products. Each product type functions very differently and has some unique features that distinguish it from the rest.
The main two types of annuities fall under either fixed annuities or variables annuities. There are a number of strong subsets of these two categories, but these two variations will pretty much sum up the variations for the average annuity buyers.
The fixed annuity refers to an annuity contract that provides a fixed income for a number of years. To do so the fixed annuity will generally have a fixed rate for the period of the contract (at least a fixed minimum rate).
An increasingly popular type of fixed annuity contract is called an equity indexed annuity. This type of contract provides a fixed payout, but allows the account to grow and participate in market growth.
The second type of annuity is called a variable annuity. This is an annuity contract that provides a variable payout. The payout amount is determined by growth or loss in the stock market. The success of the account depends a great deal on the success of the investment portfolio.
To be a buyer of annuity contracts with a variable rate, you much purchase the annuity from a registered investment advisor. They must have the proper licenses to sell securities. Fixed annuities on the other hand, can be sold by a licensed insurance agent.
The Annuity Buyers Guide
To really have a buyer's guide to annuities, it is important to lay out some of the basics of these types of accounts. Simply stated, an annuity is a contract between an individual and an insurance company. The individual makes payments to the company for a set period of years (or a one-time payment) and then the insurance company promises to make return payments to the beneficiary of the account.
At the creation of the contract, the annuity buyer establishes with the insurance company how long the payouts to their designated beneficiary will last. Some contracts can be designed to last for the life of the annuitant.
To annuitize is simply to make payments over a period of time. A mortgage can be considered a type of annuity (though in reverse). The mortgage company fronts a chunk of money (the money used to purchase your home) and you promise to pay the mortgage company a fixed dollar amount for the remainder of the term.
Some Quick Terms For The Annuity Buyer To Understand
Here are a few of the key terms laid out (very basic):
- Account Owner – the person who owns the contract
- Annuitant – the person who's life the contract is based on
- Beneficiary – the person that gets the money from the payouts
- Immediate Annuity – an annuity in which the payouts begin immediately (almost)
- Deferred Annuity – an annuity in which the payouts begin after a specified amount of time
The Annuity Buyer's Summary
This should only be used as a starting point for any annuity buyer. You should try and determine which annuity type would best fit your needs. To do so it may be advisable to for you to find a reliable financial planner that can handle and understand all of these annuity types. Annuities can be much more complex than the basics discussed in this article. Be sure you understand all of the ramification before you purchase that annuity.
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