Money may not be everything in life but another truth is that money is something in life. Without money, we cannot enjoy the basic necessities of life that is food, clothing and shelter. Therefore, wise use of money and saving it for future purposes becomes important.
Whether you are working in a company as an employee or running your own business, there comes a time when you need to call it a day and that is when the need of a steady source of income arises. This need can be fulfilled in many ways like keeping a part of your income in fixed deposits, investing in stock market etc. There is another way to fulfil this requirement- by way of annuities.
But what is an annuity? Talking in lay man terms, an annuity is a contract between a person and an insurance company whereby the insurance company guarantees to provide the investor a regular income in exchange for regular investments over a period of time or lump sum pay. An annuity is the best way to secure your retirement and to make sure you do not have to depend on anybody for your financial needs in your old age.
Insurance companies define the question of what is annuity in a more concise way. According to insurance companies, an annuity is an investment product that guarantees payment of certain amount at certain pre determined intervals. The payment can be received as interests periodically or as a lump sum at one go.
After the question of what is annuity comes the question of different types of annuities. Broadly speaking, there are two types of annuities- fixed annuity and variable annuity. Both these annuities have different features which are explained below:
· Fixed Annuity – As the name suggests, fixed annuity is the type of annuity whereby the insurance company announces a fixed payable amount annually. In this type of annuity, the insurance company guarantees the principal and a minimum rate of interest. Every year, the insurance company revises the rate of interest depending on the market conditions but this rate of interest cannot be lower than the minimum rate guaranteed. A fixed annuity is a tax deferred annuity where you do not need to pay any taxes until you withdraw the amount or start receiving an income from it.
· Variable Annuity – This is a risky investment as compared to fixed annuity. In this type of annuity, you do not receive the interest from the insurance company; rather you receive it in mutual funds. Here, you can gain money or lose money on the initial investment made by you depending on the mutual fund opted by you. In the volatile market conditions of today, it is not wise to go for this kind of annuity.
This is a brief answer to the question what is annuity. There are various other aspects that you must take into consideration when it comes to selecting an annuity type as an investment option.