Annuity Facts
By: Dean Konstantine
Many people ask me what is an Annuity? So I thought it time I answer that question in the simplest way I could.
An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you. Now some annuities will begin paying you immediately and some pay you at some future date.
Annuities typically offer tax-deferred growth of earnings (which is not tax free, it just means your paying tax as you receive the payments, not as the annuity grows) and may include a death benefit that will pay your beneficiary a guaranteed minimum amount, such as your total purchase payments.
There are generally two types of annuities—fixed and variable. In a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account.
These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.
In a variable annuity, by contrast, you can choose to invest your purchase payments from among a range of different investment options, typically mutual funds. The rate of return on your purchase payments, and the amount of the periodic payments you will eventually receive, will vary depending on the performance of the investment options you have selected.
An equity-indexed annuity is a special type of annuity. During the accumulation period – when you make either a lump sum payment or a series of payments – the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Index or other such Indexes.
The insurance company typically guarantees a minimum return on your annuity. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum.
Keep in mind you are in a contract and that contract may not be broken once signed unless there is an out clause. So, make sure you understand what you are buying before you sign on the dotted line. For more information please visit www.deankonstantine.com or www.askdeankonstantine.com
