What Are Annuity Payments (and How Do They Work?)

What Are Annuity Payments (and How Do They Work?)

Are you starting to research long-term investments?

Though half of the American households have some money in the stock market, the number goes lower for those with an annuity or pension. Despite this, annuities remain one of the safest options for a steady retirement income.

How do annuities exactly work? What are the different types of annuities to consider? Continue reading below for a quick lowdown on annuity payments.

What is an Annuity Payment?

It’s a contract between an investor and an insurance company. The contract stipulates that the investor pays either a series of annuity payments or a lump-sum amount to the insurance company.

In turn, the latter gives regular cash disbursements to the investor. Buying annuities come with different benefits. Primarily, people buy annuities to secure steady cash flow upon retirement.

Also, some people with a substantial amount of investible money buy annuities to create regular monthly income upon retirement. A perfect example is a person winning the lottery.

Through an annuity, he can convert his winnings into a steady monthly income. The annuity payment formula comes in many variants. Regardless of the formula, annuities provide safe, steady, and guaranteed cash flow.

Different Types of Annuities

Learning how to calculate annuity payments depends on your invested annuity type. There are three main types of annuities to choose from: Fixed, variable, and indexed.

  • Fixed Annuity

A fixed annuity offers a guaranteed amount of payouts. The payouts can be the fixed immediate variety. It means the insurance company pays a fixed rate at the moment.

Another form is the fixed deferred annuity. It’s when the insurance company pays you later.

  • Variable Annuity

A variable annuity allows you to enjoy higher returns. The insurance company will invest your money in mutual funds. Hence, your earnings depend on the funds’ performance.

  • Indexed Annuity

Meanwhile, indexed annuities look to strike a balance between risk and reward.

Balancing your risk appetite can be tricky. Visit rightwayfunding.com for guidance on financial management.

  • Tax Concerns

Another aspect to consider is the tax treatment of annuities. The balance in annuities grows according to a tax-deferred basis. However, it doesn’t apply to the disbursements received.

Instead, the disbursements become subject to income tax. Hence, the government taxes the payouts you receive. Moreover, it applies your regular income tax rates on the payouts.

  • Comparison to Life Insurance 

Lastly, let us compare annuities and life insurance. Though these two forms of investments may overlap, they differ in key aspects.

An annuity deals with longevity risk. It’s the risk wherein the investor outlives his assets. On the other hand, life insurance focuses on managing mortality risk.

It’s when the policyholder passes away prematurely.

Discover Other Investment Options

Now you know the basics of annuity payments, you can talk to an insurance provider and study your options. However, if you have other financial goals, consider other options instead.

We invite you to broaden your options and read our other articles. We discuss various forms of investments for people with different financial targets.