The Insurance Annuity: What It Is and How It Works

When it comes to investing your money to get a stable stream of income, there are numerous options to consider. An insurance annuity is one of the investment options available today. But what is an insurance annuity? What are its benefits? How does it work? These questions will be answered in this article.

What is an insurance annuity?

An insurance annuity refers to a form of investment between a person and an insurance company in which the person has to pay some amount of money to the company and receives periodic returns immediately or later. Generally, the individual may need to invest a lump sum at once or in bits over a period.

Once the investment has been made, the person can start receiving a regular stream of income from the insurance annuity. In addition, an insurance annuity can offer a death benefit to the beneficiaries of the annuity holder.

If you have just come across an insurance annuity, you will probably want to know its benefits. Some of the benefits of an annuity include:

It provides a guaranteed stream of income that doesn’t require active contribution or monitoring from you. Therefore, it comes in handy for anyone planning to get a stable source of income when retired.

It is a low-risk investment option. Unlike the stock market or crypto market which often experiences a downturn, an insurance annuity ensures that you are protected against the risk of losing your hard-earned money. In most cases, the value of your annuity will remain the same regardless of the trend in the market.

It provides tax-deferred growth. In other words, your money can increase significantly without paying capital gains taxes.

How does an insurance annuity work?

Before putting money in an insurance annuity, it is crucial to understand how this investment opportunity works. Basically, an insurance annuity works by giving a huge sum of money to an insurance company that turns it into a regular stream of income. This means that you put a lump sum into the investment and receive income for a set period. It is noteworthy that the set period could be for a few years or throughout the rest of your life.

To have a better knowledge of how an insurance annuity works, it is important to consider the various types available. Here are the 3 major types of insurance annuity:

Fixed insurance annuity

With a fixed insurance annuity, you will have an agreement with an insurance company to receive a pre-determined interest rate on the amount invested. The main benefit of this option is that the market rates don’t affect how much you will receive from time to time. This is because you already have a fixed rate that the insurance company needs to reimburse you.

Notably, fixed insurance annuity can be categorized into two types – immediate fixed-income annuity and deferred income annuity. An immediate fixed-income annuity allows you to start receiving regular income immediately after investing a sum of money. But with a deferred income annuity, you will only start receiving income after some months or years of buying the annuity.

Variable annuity

When compared to fixed annuities, variable annuities are more complex. This is because they come in different forms. Your stream of income from the investment will depend on your investment option, payments, and some additional charges.

Unlike fixed annuities, your income from variable annuities will vary from time to time. In some cases, you will get higher payouts whereas the payouts may be lower in other situations. If you know the important variables of your investment, you can use a multi-year guaranteed annuity calculator to determine how much you will receive from a variable annuity at a particular time.

Indexed annuity

The third type of insurance annuity is known as an indexed annuity. It combines the elements of both fixed and variable annuities. In general, an indexed annuity has two income streams. The first one is guaranteed while the other one will rely on the performance of the indexes of your investment.

It should be noted that the guaranteed income is usually lower than what you will get from a fixed insurance annuity for the same investment amount. Also, an indexed annuity doesn’t offer full benefit if the market performs excellently.

As a result of how it works, an insurance annuity can be helpful to retirees and others that want to make money passively.

With the information above, you should be able to determine whether insurance annuities are for you or not.