An annuity is best described as a contract or agreement that is generally written by an insurance company that grants you payments or income that will become available to you once you enter retirement. These payments can be designated in that contract to provide funding for a set period of time. That period of time can sometimes last for your entire life; however, it is not life insurance. In fact, it is exactly the opposite. The purpose of life insurance is to have funds distributed once you die. Conversely, an annuity only designates to pay the client while they are living. There are generally two different types of annuity contracts: fixed and variable.
Fixed Annuity
A fixed annuity is considered more safe, consistent and stable. It consists of distributing unchanging compensation to the clients as designated in the contract that was originally signed. These payments make money for the client by compounding interest rates that were also laid out in that same contract. This allows the client to see a set standard of funding to be received over a period of time. It is agreed by the insurance company that this rate at which the money accumulates will not fall below a certain amount, making the annuity that much more secure and consistent in its amount of payback. Once these payments are designated to be withdrawn, they will consistently be distributed at a certain amount until all is paid back.
Variabe Annuity
A variable annuity has many more options for both how it is invested, and how it is withdrawn. In this type of annuity, the client is in control of their investments and can choose their placement to meet their desired amount of risk. They can still be placed in an account that is fixed; however, they are generally invested in high risk/reward opportunities such as bonds or stocks. Investing your variable annuity into a fixed account in the beginning can pre-designate at what rate that money can be withdrawn at. On the other hand, if put into variable accounts, the rate of withdrawal can be dependent on the present value of the bonds or stocks, which can change indefinitely. This type of annuity should be perceived as especially risky, and should be pursued only when your finances can stand accountable for any inquired losses that may occur.
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