An annuity is a form of insurance that assures a certain amount of insurance for a certain amount of time. It has many benefits, is available in various types which are computed using different factors, and it is taxed in multiple ways.

For many middle-aged people, annuity has become a popular insurance investment choice. Having a clear understanding of investment terms, which can be confusing, will be a huge help in making the wisest choices for the future. This is how an annuity works:

Explanation of annuity

Annuity is a type of insurance investment in which you, as the insured investor, receive periodic payment returns starting in a guaranteed year. You are able to receive payments the rest of your life or during set periods. You can pay for the annuity in spot cash or in long-term, affordable cash payments.

Ways in which annuity can be beneficial to you

There are many ways annuity can benefit you. First, when you're preparing for retirement, it can be an excellent income source. At the age of 60, just at the time of your retirement, most of the annuities start paying out. You will still receive periodic amounts from your annuity even if you have no more job. If you have a child under the age of five, you can use investments of this type to aid in long-term goals, like a college funds. With annuities, taxes are deferred. This is because, only when the returns are paid out, will your investment earnings will be taxed. Finally, annuities can be very accommodating. Your goals can be matched with a particular annuity type that is offered through an investment company by an insurance agent who, through Annuity Leads, may have read your information and conditions.

Types of Annuity

Depending on your annual wages, your premium payment terms, the conditions of your returns payment, and other annuity variations, there are different types of annuities.

Based on the best terms of payment. When paying your premiums, annuity premiums can either be flexible or single. One premium annuity will allow you to pay it off in one lump sum payment. On the other hand, flexible premium annuity allows you to pay for the annuity in smaller amounts paid regularly over a certain period of time.

Your annual earnings is going to be the deciding factor for the outcome. The yearly payment can either be a specified amount or an amount that can be changed from time to time. Fixed annuities guarantee a fixed amount of annual returns, consisting of your principal and interest. These annuities are usually invested in government securities or other conservative types of investments. Annuities invested in more flexible investments, such as mutual funds, are variable annuities, alternatively. With variable annuities, payments made to you are variable, not guaranteed, and depend on the earnings your annuity makes.

The resulting outcome will depend on your returns payment terms. Your choices in the payment of returns are: life annuity or term annuity. Regular payments for a certain period of time is guaranteed by term annuity. Your beneficiary is entitled to receive the remaining returns, in most term annuity policies, if you pass away during your payment period. You are guaranteed payment for the rest of your life with life annuity, but after you pass away payment shall be stopped and no refund will be issued.

Other variations. Joint annuity is one another kind of annuity fit for married couples. Joint insurance policy is designed in such a way as to take care of the surviving partner, by way of payment of regular returns, if in the course of the currency of the policy, one of the two partners expires. Term certain is also another type of annuity that combines both term annuity and fixed annuity, where you receive fixed return payments for a fixed period of time.

Annuity payments affected by factors

Four key factors which contribute to the amount of payment returns you get include your principal, your interest earnings, demographics, and also the term of payment. Higher would be your payment returns, if the amount of your principal and your interest earnings is higher. An important role is also played by demographics. The life expectancy in your state will affect your periodic returns. Finally, if the period of payment is longer, you may receive smaller annuity payments compared to shorter or term annuities.

Paying the appropriate taxes

Annuities are subject to taxes, but they are also deferred. Only when you are getting paid returns are you responsible for paying taxes on it. There are prescribed, as well as non-prescribed annuities. Prescribed annuities are those that allow for payment of taxes evenly all throughout the term of your policy, while non-prescribed annuities are those that allow for payment of taxes in a gradually decreasing manner until taxes reach zero.

Make sure to decide the type, that suits your condition and your future needs better, when you wish make use of an annuity. In order to get the best value from your investment, compare quotes from different insurance or investment companies.