When it comes to retirement, one of the biggest concerns people have is outliving their money. An annuity can help alleviate this concern by providing a payment that is guaranteed for a specific period of time--or in some cases, even for life. However, there are many kinds of annuities. Knowing which one is right for you takes an understanding of their pros and cons.
The two major types of annuities are variable and fixed. With a fixed annuity, the insurance company guarantees a specific payment to the account holder, based upon the initial investment. With a variable annuity, the insurance company invests the initial funds in sub accounts according to the investor's choices. The performance of these accounts will make the payment higher or lower.
A fixed annuity payment is based upon the initial investment, a set interest rate, and the payout period. Once the calculation is made, the annuitant will receive those payments without change for the life of the contract. Variable annuities allow the account owner to invest the initial premium in sub accounts, which are similar in nature to mutual funds. If those investments do well enough, the annuitant may get a higher payment than he would have in a fixed annuity.
Because the payment amount for a variable annuity depends upon the performance of investments, it is better-suited to those who will not overly concerned about the chance of losing money in their investment. A fixed annuity is better for an investor who are more risk averse.
The main advantage of fixed rate annuities lies in their security and low risk. This is to say that regardless of the performance of their underlying investments, the annuity-holder is always assured of the predetermined rate of return with a deferred annuity, or the specified amount of income with an immediate annuity.
Thus fixed rate annuities can be ideal for retirees and other risk-averse people who don’t want to subject themselves to the rigors of investment. With fixed rate annuities, you get a reasonable return on your annuity investment without exposing yourself to the investment risk.
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