Definitions of Insurance Annuities
An annuity is a contract sold by life insurance companies that will provide payments, usually after the person is retired or has suffered a disability. There are several different types of annuities that vary depending on the plan the person has selected. Life insurance agent brokers sometimes overstate the amount of money an annuity will pay, as they often get paid based on fees to manage the account. Therefore it is important to do your research before listening to a broker and investing. The following are some common terms that can be helpful.
Immediate annuity – An annuity where the investor receives payouts instantly upon investing. Payments can be made for a certain time (5 to 20 years) or they can last for the rest of the investor’s life or length of disability.
Deferred annuity – Investor receives payments in the future, usually after retirement. They can have either fixed or variable rates. The funds in a deferred annuity grow tax deferred until the investor begins to withdraw money.
Annuity mortgage – annual payments made for repaying an original mortgage loan.
Mutual funds – Mutual investments are collectively managed by professional in order to buy stocks, bonds and money market accounts.
Fixed annuities – This type of annuity guarantees a certain, fixed payment amount. These are usually invested in government securities and corporate bonds.
Variable rate annuities – This type of annuity does not guarantee a certain amount of money, but the potential for greater returns is higher.
Tax deferred – In annuities the amount is not taxed until the holder starts receiving money from the annuity or makes a withdrawal from the account.
Surrender charge – A penalty for making an early withdrawal above the free withdrawal amount (usually being more than 15% of the account made before 59 years of age).