The most basic annuity definition is that it is an insurance product that makes future payments on an initial invested capital or series of contributions over time. Annuities are typically used as part of a retirement income strategy but can be employed in other investment plans as well. Your initial capital and contributions made into your annuity are allowed to appreciate without being subjected to tax; however, the payments you receive from your annuity will be taxed.
Depending on how you intend to use your annuity, it can be a great asset or an expensive financial blunder. Before adding an annuity to your investment portfolio, make sure you consult with a financial professional to ensure it is the best choice for your particular situation and financial goals.
If you already receiving annuity payments and have a need for a large lump sum, selling your payments is a great option. You can sell all or part of your payments, ensuring you have the funds you need to take care of more immediate financial obligations, while still maintaining steady income.
To learn more about annuities, keep reading. We’ve provided a quick annuity definition, and their different types, as well as information on how to sell your payments if you are currently receiving annuity payments.
Types of Annuities
Immediate vs. Deferred
Generally, annuities come in two types: immediate and deferred.
An immediate annuity begins to pay out right away. This is generally the best option if you need your payments to begin as soon as possible.
A deferred annuity will postpone payments until some point in the future. This can be an attractive option if you won’t need payments for quite some time. If you own a deferred annuity and would like your payments to begin sooner, sometimes the option of converting to an immediate annuity is available to you.
Fixed vs. Variable vs. Indexed
Whether immediate or deferred, the amount of your payout when you start receiving payments depends on whether you choose a fixed, variable or indexed annuity. The annuity definition in this case is the level of risk vs. reward assigned to each.
A fixed annuity, the most risk averse choice, pays out a consistent amount based on the balance of your capital. This is a great choice for those looking for dependable payments; however, it offers low rates of return in exchange.
Conversely, a variable annuity will deliver fluctuating payments based on the underlying value of your investment, i.e. more when your investment is doing well and less when it isn’t. While this option can result in higher returns, it also exposes the owner to higher risk.
An indexed annuity is a compromise between the two, offering a guaranteed minimum payout with a portion tied to the performance of the underlying investment.
The type of annuity that is best for you is highly dependent on your individual needs and investor risk profile.
Receiving Annuity Payments
When you begin to receive payments from your annuity, this is referred to as annuitizing. While the amount you receive will depend on the type of annuity chosen, as discussed above, it also depends on the length of time you will be receiving payments. You can choose to receive payments for a set period of time (e.g. 20 years) or until the end of your life.
Benefits of Annuities
- Provide the security of a dependable income stream at some point in the future
- Many offer guarantees that the payout the owner receives will never be less than the contributed premiums, making annuities an attractive option for risk-averse investors
- Can be tailored to suit varying situations and lifestyles
- Contrary to other retirement-savings vehicles, there is no limit to the amount that can be contributed
- Initial capital and contributions are allowed to appreciate without being subjected to tax
Drawbacks of Annuities
- Often carry high fees that can negate any gains made within the investment
- Typically carry steep penalties for withdrawing funds before a certain period of time (usually 7 years), making them highly inconvenient and expensive should an immediate need arise for the money
- Are highly complex financial tools that typically require the expertise of a professional financial advisor
- While capital and contributions are not taxed, the payments received after annuitizing are taxed
Is an Annuity the Right Choice for You?
For some investors, annuities are the perfect choice to support their financial goals and risk tolerance. For others, they may turn out to be costly endeavors, needlessly tying up funds that could be better used elsewhere. You now have the definition of an annuity–Whether or not an annuity is the right choice for you is something only you can decide. If you’re considering an annuity, make sure to consult with a financial professional to see if your financial goals and risk tolerance are compatible with what an annuity can offer. You’ve got the basics, and the annuity definition in hand. It may be time to take the next step.
If you have an annuity and would like to sell your payments for a large lump sum, please contact us today! Let’s get the conversation started on how selling all or part of your annuity payments could help you pay debts, or invest in your future without the worry of having to pay back a loan. Call us at 800.543.6513 or fill out our form to get a free quote.