When looking to invest in the future, one of the financial products that many people are currently interested in is something called 'fixed annuities.' These annuities can fall into one of two categories, immediate or deferred and there is no in between. Whether or not annuities are a wise investment choice for you depends on your particular circumstances, but the first thing to do would be to gain a better understanding of just what annuities are and how they work for you.
Broad Definition of Fixed Annuity
In very general terms, a fixed annuity is something that you invest in, either in a lump sum or over a period of time, that will provide a return for your investment in installments over a set period of time. This investment is paid to an insurance company that will set up a schedule of payments for you. These payments will be ‘fixed’ in that once they begin the same amount will be paid out in installments that are predetermined by the contractual agreement with the insurance company. For instance, you can be paid monthly or annually over a set period as defined in the contract and the amount will be the same every time you receive payment.
Deferred Fixed Annuities
Traditionally, we think of fixed annuities as being deferred. Whether you make your investment in one lump sum or in premiums over the life of the insurance policy, the payments to you will be deferred until a set point in time. Most people defer payments until retirement to have that income available to supplement their retirement plans. This type of deferred fixed annuity is usually invested in monthly installments for a number of years. When the policy matures it will most often sit there for a period of time before you begin receiving payments. Many people defer payments until the age of 62 or 65 when using their annuities to supplement retirement income.
Immediate Fixed Annuities
One of the more recent types of investment annuities is an immediate fixed annuity. Many financial advisors recommend setting up this type of account with an insurance agency when a consumer has a certain amount of money to invest and is unwilling or reluctant to invest in mutual funds or the stock market. The annuitant (investor) deposits a lump sum of money with the insurance company and the payments will begin one installment period after the deposit is made. If the contract is set up for monthly installments then the payments will begin a month later. If the contract is for annual installments then the payments will begin one year after the contract is drawn up. This is a great option for retirees who get a lump sum payment at retirement and wish to immediately reinvest it to avoid high taxes.
Unfortunately, annuities are some of the most misunderstood investment products on the market. One thing that should be understood is that fixed annuities are among the safest investments that can be made if planned well. Variable rate annuities are dependent on the market but fixed annuities provide a set income over a set period of time. When planning for your financial future, it helps to know that you will have at least a portion of your income that is a ‘sure thing.’ The economy with its inherent volatile nature makes it a gamble to invest anything that is dependent on the market, but fixed annuities provide guaranteed income. Depending on the market when installments begin, you may realize smaller returns, but should the market be down, those ‘smaller returns’ can look mighty big! When looking to invest in annuities, fixed annuities is the safest and surest investment.