Annuity

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To buy an annuity, you give a large sum of money to an insurance company (usually one that sells life insurance) and it gives back to you (the annuitant) a much smaller guaranteed sum on a regular basis, usually for as long as you live or for a specified period. While most annuities are bought from insurance companies, some charitable institutions will also sell annuities as a means of raising funds. Depending on the type of annuity, you can pay for the annuity in one lump sum, or you can make a series of payments over a period of time, which is known as the accumulation period. The appeal of an annuity is that it is typically a convenient and dependable way to receive a steady stream of money over a period of time, and therefore is attractive to the cautious investor who is worried about the stock market collapsing ( stock prices falling rapidly). Annuities are often bought by people when they retire. There are many variations of annuities available, but there are five basic types: fixed, variable, indexed, deferred, and immediate. A fixed annuity pays out a fixed amount based on a fixed interest rate for the length of the annuity. A variable annuity pays out amounts that can vary based upon the success of the investments made with the annuity contribution. These are popular because if the underlying investments do well, the annuity payout can be higher than for a fixed annuity. Variable annuities may provide the annuitant with a minimum guaranteed return. An indexed annuity, where the return is linked to the performance of an underlying index fund, usually of stocks or bonds. A deferred annuity makes payments at a later date; in the meantime you can contribute money to the annuity during the accumulation period. An immediate annuity, on the other hand, makes payments immediately. Fixed annuities can be immediate or deferred. Because there are so many kinds of annuities, buyers of annuities should clearly understand: the type of annuity they are buying; how much money they will be paying, and at what time; how much money it will ultimately cost them; how much they will be paid back and when; who will be the beneficiaries of the annuity if the annuitant dies, and how much, if anything, the beneficiaries will receive; plus any risk factors, penalties or conditions involved. The financial strength of insurance companies that sell annuities is evaluated and assigned a rating by A.M. Best.