Understanding What an Annuity is

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There are common types of financial investments including stocks, bonds, mutual funds and annuities. Investing in an annuity has advantages as well as many disadvantages. Some say that it is safer than stocks and most of the other investments while some others disagree. Let us first understand the annuity definition. An annuity is an insurance product. It is a contract between you and the insurance company. You basically give the insurer money and they will pay out income to you according to the contract. Annuity payments are usually spread over a number of years. The money you contributed in the annuity may grow tax deferred which means you will not have to pay any taxes to Uncle Sam on your income put into the annuity until you withdraw your money.

Different insurance companies offer different types of annuities. Some investors like to put their money in fixed annuities, some like variable annuities more and some decide to invest in an annuity index. As with all types of investments, there are some risks associated with investing in different types of annuities. The higher the level of risk you accept, the more your money will grow if the market is not down and your annuity investments are in the right places. However, lots of people invest in annuities because they want to invest in anything safer than stocks or mutual funds, hope to invest without paying taxes and like the various guarantees that the insurance companies throw in.

The income you will receive from your annuity can be in one lump sum payment, monthly payments, quarterly payments or yearly payments. You can choose how large each payment will be or how long you want to receive payments for. Some people want to receive payments for life but others may choose large payments for fewer number of years. While payments are guaranteed to a certain extent, there are a lot of expenses you will have to pay to the insurance company in exchange for the guarantees they give. This is why many people think that annuities are expensive investments.

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