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Annuity is a long-term financial investment contract which provides a regular retirement income. Annuities are commonly provided by insurance companies.
Annuities are of the following types:
- With a single premium annuity, you have to pay a single consolidated amount. To invest more money in the future, you need to buy another annuity. A flexible payment annuity on the other hand requires that you make on-going contributions as you wish.
- With fixed annuities,
an amount is guaranteed for a fixed period of time. But once the term expires, the company may fix a new rate that may be higher or lower than the rate originally offered. But the payout may not be as much as other annuities. On the other hand, variable annuities, dependant on the volatile stock market, may result in changes in the amount. Some "equity indexed" annuities may possibly have an assured minimum rate while others may not.
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Payments can be received through a variety of payout options: monthly, quarterly, or annual payments which may start immediately or in the future.
Annuities have the advantage that they are tax-deferred and not tax-deductible. The funds earn interest without having to pay taxes. But, taxes are charged on the earning from the interest. So, while deciding on the payout option, it is advisable to consider the tax implications.
It is for you to decide how long you want to receive payments; for as long as the annuity holder lives, for as long as both the annuity holder and a survivor live, or for a fixed time. But with time, the payments might decrease.
In case of single life annuities, the payments are calculated based on predicted life expectancy and the insurance company pays as long as the annuity holder lives.
With Life or Period Certain Annuities, you get paid all your life or for a predetermined number of years, whichever is longer. For instance, if the time period of ten years of payments has been fixed, then even if you die, your beneficiaries will inherit the rest of the money. However, if you live more than ten years, the insurance company has to pay you for the rest of your life. |
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| Joint and Survivor Annuities are those which continue making payments to the joint annuity holders all life long. |
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