An annuity is a sum of money that a financial company agrees to provide you in payments over time. This is usually done in return for your agreement to provide the company with a large amount of money or other assets, called the principal on the annuity. Many annuities are structured as insurance policies, providing compensation for later years in life. The amount you pay out will depend on a number of variables.
You can take out two types of annuities -- fixed and variable. Under a fixed annuity, you know exactly how much money you will receive each year the plan pays. This is because the amount of money is fixed ahead of time. The exact amount will depend on the value of the principal, but the issuing company will provide a full account ahead of time.
Variable annuities fluctuate in value. The exact amount that you receive each payment period will depend on a number of factors, including the value of your assets and the prevailing interest rates, depending on the way in which the annuity is structured. Although variable annuities are riskier than fixed annuities, they have the potential for a higher rate of return on your investment.
Value of Assets
The payments from your variable annuity will change in value depending on changes in the value of the investment that underlie the annuity. As these assets become more valuable, you receive more money. In addition, many variable annuities are pegged to prevailing rates of interest. As the interest rate goes up, so does the size of the payment you receive. As they drop, so does the payment.
Some indexes are also pegged to changes in inflation. Some people on fixed annuities receive slightly different amounts of money each pay period depending on changes in inflation. This allows you to still receive enough money to on, even if inflation rises dramatically. However, many annuities are not scaled to inflation, and payments depend solely on other factors.
- "Annuities for Dummies"; Kerry Pechter ; 2008
What Is an Annuity Payment?
There are numerous types of annuities. Leases and rental payments are two examples. In both types, though, a specific amount of money...
How Does the Inflation Rate Affect Insurance?
When the average price for goods and services rise, it is called "inflation." In the United States, the rate of inflation has...
How to Calculate Monthly Annuity Payments
An annuity is a stream of payments that last for a defined number of years or for the rest or your life....
How to End Annuities Without Paying Fees
Annuities are tax-deferred investments offered through insurance companies. The design of deferred annuities allows you to save money toward retirement, when you...
What Commission Is Paid on a Fixed-Indexed Annuity?
A fixed-indexed annuity is a complex insurance product that functions as a retirement savings plan. These plans pay interest based only on...
Do I Pay Taxes on an Annuity Inheritance?
Annuities are insurance policies that guarantee you an income for your entire life or for a set period of time. When you...
How Much Do Brokers Get for Variable Annuities?
People who buy variable annuity contracts must pay a commission fee whenever they make premium payments. The commission fee, or at least...
How Much Will My 401(k) Pay at Retirement?
If you've done a good job saving money in your 401k plan, you may have a lot of money to use for...
- What Is Commission on Annuities?