3 Different Types of Annuities and How They Can Be of Benefit

12 minutes

 

Photo courtesy of clay marketing

Did you know that Charles Dickens refers to annuities in his novels often because they were the favored investment of the upper class in 18th century Europe?

Or did you know that Babe Ruth didn’t lose his money during the Great Depression because his money was safely invested in annuities?

One last one for you. Did you know that Wheel of Fortune often gives away annuities as prizes?

Annuities are a product that most of us have heard of, but what do we really know about them? What are they really? How do they work and when should I use them?

These are some of the questions we will answer as well as looking at the different types of annuities, and there are many.

What are Annuities?

Annuities were invented by Babylonian landlords in approximately 1700 BC. They used the income from a certain piece of farmland to provide lifetime rewards for soldiers loyal assistants.

In more recent times, annuities were first offered to the American public in 1912 by the Pennsylvania Company for Insurance on Lives and Granting Annuities.

According to Investopedia, an “annuity is a contractual financial product sold by financial institutions that are designed to accept and grow funds from an individual and then, upon annualization, pay out a stream of payments to the individual at a later point in time. The period of time when an annuity is being funded and before payments begin is referred to as the accumulation phase. Once payments begin, the contract is the annuitization phase.”

Annuities were designed to be a reliable source of steady cash flows for an individual in their retirement years. Or alleviate risk or the fear of outliving your money. A very real fear.

Annuities can also be created to turn a large lump sum of cash into a steady cash flow. This is great for winners of large sums of cash such as lottery winners or a winning a lawsuit.

Defined benefit pensions or Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass.

You remember those J.G. Wentworth commercials? Well, those are the perfect example of a lifetime guaranteed annuity. You give them your lump sum of cash and they give you a lifetime cash flow for that exchange.

How do Annuities Work?

An annuity is a cross between an insurance product and an investment product. They come in many different shapes and sizes, but the basic theme is that you give your money to a financial institution, like an insurance company and they promise you a certain rate of return, usually for the rest of your life.

The annuity will make payments to you on either a future date or series of dates determined by you. The income you receive from an annuity can be paid out monthly, annually, or even a lump sum payment. Continue reading “3 Different Types of Annuities and How They Can Be of Benefit”