Annuities Explained

Are you looking to purchase annuities? If you are, then you definitely need to know what an annuity is.

But for those who are not aware, an annuity is a contract between an individual and an annuity provider in which the individual has to make an investment and the provider guarantees to provide regular monthly income to the individual for a specified period of time or for the rest of his life.

Generally, at the beginning of the contract, the individual is required to invest a lump sum amount and then depending on the annuity rates, he will receive regular income. Income that will be received by the individual will depend on various factors and one of the most important factors is whether the individual has chosen term annuity or life annuity.

Basically, there are four main types of annuity products that you can consider. These include variable, fixed, deferred and immediate annuities. These are just the basic divisions and with basic knowledge about these types of annuity products, it shouldn’t be difficult to find the best annuity products in the UK.

Fixed annuities – Under a fixed annuity contract, the insurance company promises to make fixed payments to the policy holder for a predetermined length of time. Together with the guaranteed payment, the insurance company also guarantees the earnings on the account as well as on the principal balance. Fixed annuities are safer and offer lower rates because the risks associated are also low.

Variable annuity – under a variable annuity contract, you will receive periodic payments in exchange of a lump sum payment made to the insurance company. The purchase payments can be used to invest in a range of options which are mutual funds. Since the value of the account is dependent on the mutual funds, the rate of returns will depend on the condition of the market they have been invested in. Although they offer good rates, there may be extra charges associated with this type of annuity product. These annuities are really complex and a large number of people do not like investing in this type of annuity because they find it hard to manage their accounts.

Deferred annuities – this is a type of annuity contract delays payments of income until the annuitant elect to receive them. Although deferred annuities are not very popular, they can be the best choice depending on your individual circumstances. Under this option, there is usually a delay from the premium payment and the first payout you receive. There are two main phases of this type of annuity. First is the savings phase in which you invest funds into the account. Second is the income phase in which you receive payments.

Immediate annuities – gives out payments immediately after you have paid the premium. This type of annuity does not have an accumulation period. You will start receiving payments as soon as the contract has been established. The insurance company will calculate the amount of monthly income it can provide based on the term of the annuity, your age and gender so they can estimate your life expectancy.