Know What You Should Consider while Shopping for an Annuity

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Know What You Should Consider while Shopping for an Annuity

Posted On : Nov-15-2010 | seen (357) times | Article Word Count : 726 |

Annuity is of three basic types. The types differ on the basis of how the money is invested. This article will give you some guidelines on how to shop for annuities.

Three Types of Annuities

There are three kinds of annuities. Each differs in how the money in your contract is invested.

Fixed Annuity

Your invested money will earn a fixed rate of interest that is guaranteed by the insurance company. Once you annuitize, your payments are also fixed. Since there is no risk involved in this investment, this is a plus for the conservative investor. The downside is that you cannot take advantage of any gains you could make if the stock market performs well.

Variable Annuity

A variable annuity takes your money and places it in investment options known as sub accounts. These are similar to mutual funds. Each sub account has its own degree of risk ranging from aggressive growth funds to bond funds. On the positive side, you have the opportunity to make substantial gains depending on how your investment performs. If your investments perform poorly, you will lose money. Another VA downside to consider is that it may cost you to switch your money among sub accounts. When you annuitize, your payments fluctuate depending on the performance of your investments. Some VAs allows "fixed annuitization" which means you receive fixed payments. The insurance or investment company will recalculate your payments each year based on the performance of your investments.

Equity-Indexed Annuity

You can gain the stability of a fixed account and still enjoy the rewards of growth offered by a stock performance index by investing your money in an Equity-Indexed Annuity. A fixed account will hold your money while it earns additional interest based on the performance of a particular stock index, such as the Standard & Poor's 500 Index, the Dow Jones Industrial Average, the NASDAQ Composite Index, or the Russell 2000 Index. The disadvantage is that you still essentially have a fixed annuity. Any gains you can make in the contract, due to the performance of the stock index, are fairly small. Your payments are fixed once you decide to annuitize.

Canceling Your Annuity

If you buy an annuity and then decide to cancel the contract, you can surrender your annuity. If cancellation occurs within the first seven or eight years after purchase, most companies will charge a surrender fee. Owning an annuity for a short period of time and proceeding with cancellation will cost you more dollars in fees than if you cancel after owning for a longer time-period. Let’s say your Annuities have a seven-year surrender period. You surrender your annuity in the first year and pay seven percent of your total investment value to the company. If you surrender in the second year, you may pay 6 percent, and so on.

Annuity Shopping Guidelines

If you decide to shop for an annuity, here are some things to consider:

* Figure out how much you have accumulated in other tax-deferred savings plans or pensions. Determine if there is a possibility that you could outlive your retirement assets.

* Determine what kind of annuity you want. Do you want your investment to be steady and guaranteed? Then you may want to consider a fixed annuity. Are you willing to ride out the highs and lows of the stock market in the hopes of making more money? Then you may want to opt for a variable annuity.

* Estimate how long you plan to have your money in the contract. On most annuities, you will pay hefty surrender fees if you surrender during the first seven to eight years on your contract. You also must have your money in the contract for a long time in order to have the tax deferral justify the high fees. According to Morningstar, on average it takes 10 to 15 years of tax-deferral to justify owning a variable annuity instead of a mutual fund.

* Consider the financial strength of the provider. Most though not all, states will protect you from the insolvency of an annuity provider through "guarantee associations" or "guarantee funds." There are limits to that protection. In most states, there is a limit of $100,000 for the current value of the annuity.

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<h1>Know What You Should Consider while Shopping for an Annuity</h1> Author: <a href='http://www.articleseen.com/profile_Simon Cronje.aspx'>Simon Cronje</a> Three Types of Annuities

There are three kinds of annuities. Each differs in how the money in your contract is invested.

Fixed Annuity

Your invested money will earn a fixed rate of interest that is guaranteed by the insurance company. Once you annuitize, your payments are also fixed. Since there is no risk involved in this investment, this is a plus for the conservative investor. The downside is that you cannot take advantage of any gains you could make if the stock market performs well.

Variable Annuity

A variable annuity takes your money and places it in investment options known as sub accounts. These are similar to mutual funds. Each sub account has its own degree of risk ranging from aggressive growth funds to bond funds. On the positive side, you have the opportunity to make substantial gains depending on how your investment performs. If your investments perform poorly, you will lose money. Another VA downside to consider is that it may cost you to switch your money among sub accounts. When you annuitize, your payments fluctuate depending on the performance of your investments. Some VAs allows "fixed annuitization" which means you receive fixed payments. The insurance or investment company will recalculate your payments each year based on the performance of your investments.

Equity-Indexed Annuity

You can gain the stability of a fixed account and still enjoy the rewards of growth offered by a stock performance index by investing your money in an Equity-Indexed Annuity. A fixed account will hold your money while it earns additional interest based on the performance of a particular stock index, such as the Standard & Poor's 500 Index, the Dow Jones Industrial Average, the NASDAQ Composite Index, or the Russell 2000 Index. The disadvantage is that you still essentially have a fixed annuity. Any gains you can make in the contract, due to the performance of the stock index, are fairly small. Your payments are fixed once you decide to annuitize.

Canceling Your Annuity

If you buy an annuity and then decide to cancel the contract, you can surrender your annuity. If cancellation occurs within the first seven or eight years after purchase, most companies will charge a surrender fee. Owning an annuity for a short period of time and proceeding with cancellation will cost you more dollars in fees than if you cancel after owning for a longer time-period. Let’s say your Annuities have a seven-year surrender period. You surrender your annuity in the first year and pay seven percent of your total investment value to the company. If you surrender in the second year, you may pay 6 percent, and so on.

Annuity Shopping Guidelines

If you decide to shop for an annuity, here are some things to consider:

* Figure out how much you have accumulated in other tax-deferred savings plans or pensions. Determine if there is a possibility that you could outlive your retirement assets.

* Determine what kind of annuity you want. Do you want your investment to be steady and guaranteed? Then you may want to consider a fixed annuity. Are you willing to ride out the highs and lows of the stock market in the hopes of making more money? Then you may want to opt for a variable annuity.

* Estimate how long you plan to have your money in the contract. On most annuities, you will pay hefty surrender fees if you surrender during the first seven to eight years on your contract. You also must have your money in the contract for a long time in order to have the tax deferral justify the high fees. According to Morningstar, on average it takes 10 to 15 years of tax-deferral to justify owning a variable annuity instead of a mutual fund.

* Consider the financial strength of the provider. Most though not all, states will protect you from the insolvency of an annuity provider through "guarantee associations" or "guarantee funds." There are limits to that protection. In most states, there is a limit of $100,000 for the current value of the annuity.
About the Author: Simon Cronje is a business consultant who has good information on <a rel="nofollow" href="http://www.totalreturnannuities.com/">Annuities</a> and <a rel="nofollow" href="http://www.totalreturnannuities.com/">annuity</a>. For more information visit <a rel="nofollow" href="http://www.totalreturnannuities.com/">http://www.totalreturnannuities.com/</a>. Article Source: <a href='http://www.articleseen.com/Article_Know-What-You-Should-Consider-while-Shopping-for-an-Annuity_41786.aspx'> http://www.articleseen.com/Article_Know What You Should Consider while Shopping for an Annuity_41786.aspx</a>

Article Source : http://www.articleseen.com/Article_Know What You Should Consider while Shopping for an Annuity_41786.aspx

Author Resource :
Simon Cronje is a business consultant who has good information on Annuities and annuity. For more information visit http://www.totalreturnannuities.com/.

Keywords : annuity, Annuities,

Category : Finance : Finance

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