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Meaning Of Annuity

Updated On Nov 27, 2021

Long-term, short-term, and intermediate financial goals are all part of the comprehensive financial planning of an individual. The best financial objectives are ones that align with an individual’s values and desires. Financial goals are measurable and specific milestones that, when met, bring a person closer to their ideal future. They should not, however, be confused with a budget or a financial plan.

Setting appropriate financial goals necessitates a high level of financial understanding on the part of the individual. For instance, an annuity is a type of insurance contract that is issued and distributed by financial organisations with the goal of paying out invested funds in the future as a fixed income stream. Monthly premiums or lump-sum payments are used to acquire or invest in annuities. The holding institution produces a future stream of payments for the annuitant for a set period of time or for the duration of their life. To understand more about annuity, read on.

Types Of Annuities

Following are the types of annuities that an individual can opt for -

  • Fixed Annuities

A fixed annuity is an insurance contract that guarantees the respective individual a particular, guaranteed interest rate on their account contributions. A variable annuity, on the other hand, pays interest that varies depending on the success of an investment portfolio selected by the account owner. In retirement planning, fixed annuities are commonly employed.

  • Variable Annuities

Variable annuities provide the possibility for a bigger return, but they also come with a higher risk. An individual can choose from a menu of mutual funds that go into their respective personal "sub-account" in this example. An individual’s retirement payouts are determined by the performance of the investments in their respective sub-account.

  • Indexed Annuities

When it comes to risk and possible profit, indexed annuities are in the middle. Although a percentage of an individual’s return is connected to the success of a market index, an individual has assured a minimum payout.

How Does An Annuity Work?

Annuities are meant to give insured individuals a consistent cash flow during their retirement years and to relieve them of their concerns about outliving their assets. As these assets may not be sufficient to maintain their respective standard of life, some individuals may also choose to acquire an annuity contract from an insurance company or other financial institution.

Annuities are good financial solutions for those individuals who want a steady, guaranteed retirement income. As the lump sum invested in the annuity is illiquid and susceptible to withdrawal penalties, this financial instrument is not suggested for younger people or those who require liquidity. Longevity risk is mitigated by the fact that annuity holders cannot outlive their income stream.

What Is the Surrender Period In An Annuity?

The surrender period is the time that an individual must wait before withdrawing cash from their respective annuity without incurring a penalty. Withdrawals made before the surrender period's completion may be subject to a surrender charge, which is basically a postponed sales cost. This time period usually lasts several years. If an investor withdraws the invested money before the surrender time expires, they may face a substantial penalty.

Why Buy An Annuity?

Annuities are a solid financial option for people who seek a predictable, guaranteed income in retirement. This financial instrument is not recommended for younger individuals or those who demand liquidity since the lump amount invested in the annuity is illiquid and subject to withdrawal penalties. The fact that annuity holders cannot outlive their income stream reduces longevity risk.

Endnotes

The beauty of yearly financial planning is that it allows an individual to revisit and change their goals as life unfolds, as well as to measure their progress toward them. Over time, an individual will realise that the minor things they do on a daily and monthly basis, as well as the larger things they do each year and over decades, all, contribute to their financial objectives.

Also Read:

What Are The Benefits Of Investing In National Pension Scheme

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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