The Pros and Cons of Annuity

Article Written By: simon.cronje01

Old age often brings along with tensions and worries. Of the many in the league, one is that of fund. One tend to get worried becouse you no longer have a steady source of income and in this situation you may not be able to maintain your dignified standard of living or not. The solutions that the market has to offer are quite a few.

However, you need an option that suits you the best, in every possible way. One option you can contemplate, annuity, in itself is nothing but a pact with an insurance company, wherein it gives you a policy, in lieu of your money deposited with them. In this policy the insurance company clearly states the advantages it would provide you with.

Immediate annuity is mainly of three types inflation-indexed, fixed and variable. Deferred annuities are fixed, longevity, variable and equity-indexed. While making a choice, however, you must be aware of the functionalities of each different type.

Considering the requirements of individuals, if you are looking for a regular periodic income then your pick can be immediate annuity. When you purchase this, you actually enter into an agreement with the insurance company in concern, to buy an assured stream of income. The insurance company then calculates the sum of money it can give you on a monthly basis.

This calculation is done on the basis of firstly, the type of immediate annuity you have chosen. Secondly, the time period or term(joint life, life-only, term certain) that you have chosen. Thirdly your gender and age so that they can have an estimation of your expectancy of life.

Now the obvious question that comes to your mind is, which type of immediate annuity to opt for. The solution is to right here. With the fixed type, the sum of money you receive as income every month will be a fixed amount. It will remain the same throughout the term of your contract. The approximate amount of income you receive will be determined depending on how much you invest.

With the inflation-indexed form you receive a guaranteed source of income from the insurance company. The income that you receive will increase each year based on a formula that has been determined previously. The increase is usually related to changes in the consumer price index. It will initially give a lower amount of monthly income than a non-indexed one, but over time, with the continuation of inflation, the monthly income will increase gradually, surpassing the amount you might be getting from an equivalent non-indexed one.

In case of the variable immediate annuity, the insurance company is not bound to provide an assured stream of income to the person in concern. The sum of money you receive as income will be dependent on how the portfolio of underlying investments performs. Thus your payment each month will be a varying amount, depending on the way it is structured. It may also reset once a year, but that again depends on the structure.

Hence now that you have a fair idea you may also want to know about the alternatives if any. There are a few namely, laddered bonds, retirement income funds, or a total return portfolio. As is always the rule you can only be given guidelines but the decision is yours and therefore awareness and education are always mandatory in any such decision making scenarios.

About the Author

Simon Cronje is a business consultant - For more information about annuity visit http://www.totalreturnannuities.com/.

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