An annuity is a financial contract written by an insurance company that provides for a single future payment or for multiple periodic payments.
Annuities have two phases. The accumulation phase and the payout phase.
The Accumulation Phase: During the accumulation phase, payments are made towards various investments that are meant to increase the overall value of the annuity.
The Payout Phase: During the payout phase, you begin to receive back your initial payments and any profits that were made from their investments.
Immediate Annuities – An annuity in which the annuity payout period begins immediately or within one year of the annuity purchase date.
Deferred Annuities – Deferred Annuity Payments begin at some future date.
Fixed Annuities – When you purchase a fixed annuity, the insurance company invests your funds and provides you with a specific guaranteed return (i.e. you can select a lump sum or periodic payments).
Variable Annuities – When you purchase a variable annuity, you generally get to decide how the money is invested, by choosing from a pre-selected list of funds. Accordingly, the returns will vary depending on the performance of the chosen investments.
Many annuities have early withdrawal penalties, which means if you try to withdraw your money early, you may pay surrender charges. Typical surrender periods vary from two – ten+ years depending on the company. If you’re looking to access some of the money from your annuity early, you may want to consider getting in touch with a company like Rising Capital, who can help you get access to your funds when you need them without worrying about early withdrawal fees.
When it comes to the security of annuities, you have to be careful of what insurance company you choose to do business with. Annuities are only guaranteed by the insurance company holding the policy. If the company you have an annuity though isn’t financially secure, you may find yourself in trouble once your annuity enters the payout phase. Many states do have guaranty associations that cover an insurer’s obligation to fulfill its payment contracts, however, each state only covers up to a certain amount.
Receiving periodic payments of a specific amount work for some, however, for other a rigid payment schedule can be constricting. In the case of an unexpected event where you need cash now, simply having funds in an annuity that is out of your reach may not be helpful.
If you find yourself short on cash and decide that your annuity payments simply aren’t working for you, you can choose to sell them in exchange for a lump sum. You also have the option to sell only part of your annuity if that works better for your situation.
You can sell a certain period of payments ( 1 year out of 10 years), a specific amount out of your payments ($500 out of $1500 monthly), or you can sell your entire plan. The decision is ultimately based on what is in your best interest and what your financial goals are.