If you have been looking to have annuities explained in a simple, easy to follow document, this is the right place. The goal of this article is to explain annuities in a clear, non-sales way that will ensure you have enough knowledge to speak to your financial representatives and choose the best option for you.
Annuities Explained by Type:
An immediate annuity simply means that you make a single lump sum payment to your annuity to provider; in return you will receive monthly payment for a predetermined amount of time which is usually life. The immediate aspect simply means that the monthly payments will start immediately.
A deferred annuity is just like an immediate annuity, except that the payments back to you do not start right away. Instead, your money will continue to gain interest until you choose to begin taking your monthly payments.
Fixed Annuity
A fixed annuity is a type of annuity that has predetermined choices. These include the length of the contract (usually life), the interest rate you will receive, and how the money is distributed to your heirs if you choose this option.
A variable annuity is similar to a fixed annuity, except the interest rate is not defined. Instead, you invest your annuity dollars into whatever you want, and you get the interest rate based on the investments you made. There are also some tax considerations to this type of annuity.
Of course, when you got to see your financial planner, you will probably have annuities explained to you in a much different way. However, all annuities are based on what you have read above. There are many variations and many different ways for banks and other financial firms to charge you ridiculous fees.
There is nothing complicated about annuities and you should understand exactly what you are getting for your money. If someone is trying to charge fees for an added service or benefit, be sure you know exactly what the benefit is and what it is worth to you. The fees can get out of control if you let them.
To drive this point home, I sent my wife to the bank to have annuities explained. She knows absolutely nothing about annuities and I wanted to see what she would have chosen if I asked her to line up an annuity for our retirement. She came back very excited about the income we could receive by converting our retirement accounts into a deferred annuity that would begin payments right after I turn 65.
She also had quite a few options that the salesperson told her were must haves. Of course, these services would have been nice to have, but the total fee for the annuity she was thinking about was a touch over 5% per year! The moral of the story is before you have annuities explained by your broker; you should do all your own research and make sure you fully understand what the different options are.
