Understanding AnnuitiesUnderstanding annuities is of importance if you want maximum financial protection after retirement. An ‘annuity’ is an interest bearing contract that grows tax deferred savings with a guarantee income for life. Annuities can be bought from insurance agents, stock brokers and various other institutions. The selection of the right annuity type is probably the most important decision that you make throughout life. For several individuals, their ‘annuity’ is the only assurance of an income after retirement from work and it is not a decision that should be rushed in to.
Basic Considerations in Understanding Annuities 
At first, it is important to understand the fundamental principles of annuities. In fact, an annuity is a contract which is made by the insurance company or financial institution. The person who seeks an annuity is known as annuitant. At the basic level, the contract will give the annuitant a guaranteed income according to the terms and conditions, in exchange of a certain amount at the premium on the outset. The contract could feasibly be compared to a “loan” which is provided by the annuitant to a financial institution, with latter paying back that amount over a certain period of time. As there are many different kinds of annuities available, it is significant that you do some homework to know which one suits you the best.
There are many types of annuities to go well with different kinds of needs, but the main types are level annuities, increasing annuities and investment linked annuities.
Level annuity, sometimes known as immediate annuity, income annuity, and single premium immediate annuity pays out the same amount of income every year for rest of your life. Such annuities usually pay higher starting values as compared to ‘fixed and investment-linked annuities’, but you need to think about the effects of increasing interest rates. Can you manage with having no increases in your ‘annuity income’ at all during the retirement that could last thirty to forty years? Increasing Annuity In order to protect the income from inflation, you can select an annuity type that is specifically designed to gain value every year. Mainly, there are two options: • Increasing
fixed annuities:
In such annuities, your overall income is assured to increase at fixed rates every year, usually by 3 % to 5%.
• Investment-Linked Annuities Investment linked annuities or variable annuities can increase the chances of higher ‘income’ or account value than what you could receive from a level or index annuity. However, you have to be comfortable with the possibility your annuity income or value could go up or down with market fluctuations of the stock market. The major risks with this type of annuity are: • The income is most likely to vary ever year; • And the amount of growth is not predictable. • You may lose value. So, if the threats of possibly decreasing and unpredictable retirement incomes are worrying you, then, you can stick to fixed or index annuities. Above all, understanding annuities can help you immensely in choosing the most appropriate annuity that suits your needs perfectly.
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