What Exactly Is An Annuity?

WHAT EXACTLY IS AN ANNUITY?

Before getting started, it may be helpful to define what an annuity is and what it does.

Basically, an annuity is a contract between you and an insurance carrier. When purchased for income the contract is for a stated amount of income (payout) in the future (even if that future is just 30 days away) for a said amount of purchase price right now. Think of it as buying/locking in a future income stream. That is all it is. But then, to differentiate their products from all the others on the market, the variations on this theme begin. But don’t give up hope! You can learn how to compare annuities quickly and easily using this book.

WHY WOULD ANYONE BUY AN ANNUITY?

The traditional primary use of an annuity is as a transfer-of-risk product (as befits an insurance product). Purchasers are transferring their risk of an uncertain income stream to an insurance carrier for a known, guaranteed income stream. This transfer-of-risk is made possible by the guarantees in the product. In general, the more guarantees an annuity offers, the better the transfer-of-risk and the stronger the product. Therefore, when looking at how much is an annuity, the focus should be primarily on the guarantees and the only reason to buy an annuity is for the guarantees it contains.

However, it is common nowadays for people to purchase annuities (especially the variable type) to take advantage of the tax deferral they confer primarily. If that is the primary reason for purchasing the annuity you may not be as concerned with the income payout in the future and indeed, the future income stream may not even be guaranteed as to amount. That is fine; you can still use this book to make sure you know exactly what you are getting into and to get the best deal for yourself.

I assume the reader is interested more in the traditional use of an annuity for mitigating the risk of an uncertain future income stream.

IS AN ANNUITY RIGHT FOR YOU?

Annuities sales are on the rise, hitting a total of $230.1 billion total in 2013. Perhaps you are considering how one might fit into your retirement savings or income plan, or perhaps you are looking at several different ones but cannot figure out which one would be best.

To be perfectly honest, as a financial services professional I believe it behooves everyone to consider an annuity for at least part of their retirement income plan. There is no harm in checking it out, and if you see it is not for you, there is no harm done. On the other hand, if you could benefit from one but neglect to check it out, you could be doing yourself a severe disservice. Checking it out is a reasonable, proactive step to take.

Note: sell an annuity, best structured settlement payout