Thursday, July 28, 2011

What Is An Annuity?

An annuity is an investment that pays you a set monthly income for a set period of time. You can even get guaranteed income for life.  Think of it as a way to protect yourself from unforeseen financial circumstances.

How do annuities work?

An annuity works like life insurance in reverse. With life insurance, you pay a certain amount each month over many years so your loved ones will get a lump sum when you die. With an annuity, you pay a lump sum up front, and get income back each month over many years.

The size of your monthly payment will be higher if you buy when interest rates are high. For most people, it’s better not to put all your money into annuities when interest rates are low. The type of annuity also affects your monthly income.

There are two main types of annuities:

1. Term-certain annuities

This type of annuity guarantees you a set monthly income for as many years as you want, up to age 90. If you die before you receive all your payments, they continue to go to your estate.

2. Life annuities

A life annuity gives you a set monthly income for life. Payments will stop when you die and no money will go to your estate. You can change this if you add extra options to your agreement. For example, you can get a life annuity that makes payments to your spouse after your death. You can get an annuity that increases your income to keep up with rising prices. But with each extra option you choose, you get a lower monthly payment.

Remember: You buy an annuity to get guaranteed income.

Contact us and we can help you understand how interest rates and other factors will affect how much income you can get.