There are numerous types of annuities. Leases and rental payments are two examples. In both types, though, a specific amount of money is due to be paid or received at specific intervals, say every week, every month, quarterly or annually. Annuities are usually paid or received over a defined period of time. Another type of annuity is a life annuity.
A life annuity is different from other annuities in that it usually ends when the person receiving the payments dies. Many people buy annuities to give them a steady stream of income during retirement. These types of annuities are really financial contracts. They are often sold by insurance companies.
Generally, you would make a one-time or lump-sum payment or regular payments to the insurance company to fund the annuity. Common types of life annuities are: Fixed and variable annuities; guaranteed annuities; joint annuities; and impaired life annuities.
Fixed and Variable Annuities
Owners of fixed annuities receive the same amount of money every period. In some cases, the amount might increase based upon a percentage specified by the contract.
Variable annuity payments will probably change in amount, based upon the performance of the bonds and mutual funds in which the annuity funds are invested.
Some people might not live long enough to recover the money they invested in an annuity. A guaranteed annuity provides payments to the person's family or estate for a specified time, even if the annuity owner dies. If the annuity owner outlives the specified time period, he or she will continue to receive payments.
There is a trade-off, however. Generally, the payment is lower to offset the insurance company's greater risk.
The two most common type of joint annuities are joint-life and joint-survivor. With these types of annuities, payments can be made to married couples. Payments might stop upon the death of one spouse or both.
Impaired Life Annuities
You could qualify for an impaired life annuity if you have a health problem that threatens to cut short your life. Conditions include cancer, diabetes, asthma, heart condition and high blood pressure. Because your life might end prematurely, these annuities usually pay you more.
Do Your Homework
Before you buy an annuity, do your homework. Calculate how much your payment would be. Buy annuities only from reputable and financially strong companies. In addition, make sure the returns being promised can be verified. Also, find out what you will be charged in expenses, commissions and fees.
Another important consideration is surrender value. Say you decide to cancel the annuity and get your money back. What will you be charged to do this?