What are Annuities and Why Would I Want One?

Annuities are poorly understood by a lot of people.  We've all heard the word, but what, exactly, are they?  An annuity is an agreement or contract between you and an insurance company.  You make either a onetime payment or a series of payments and the insurance company agrees to invest the money and make periodic payments into an account set up for you.  The payments can begin immediately or at a future date, depending on the contract between you and the insurance company.  Often, an annuity will provide a death benefit for your spouse.

There are three types of annuities: Fixed, variable and equity-indexed, which is a special case.  A fixed annuity provides a guaranteed amount of growth at a fixed interest rate for the duration of the annuity.  Payment amount is also guaranteed with a fixed annuity.  The payments will last for the time specified in the contract between you and the insurance company.  These annuities are the best for people who need to know exactly how much they will be receiving in each payment.

A variable annuity allows you to invest the money in a selection of options.  Most of the time these options are mutual funds, though other types may be available.  The size of your payments will depend on how well the investment performs.  A variable annuity is an excellent choice for investors that don't mind a little risk. There is the opportunity to make much more money in this fashion than in a fixed annuity, but you may also lose money if your investments don't do well.

An equity-indexed annuity is a special case.  While you are making your initial payments, the insurance company gives you a return that's based on a changing equity index.  Usually, you are guaranteed a minimum amount of return on this type of annuity.  This is another option that people who don't mind some risk involvement choose.  It guarantees a minimum return, but the maximum is based on how well the equity index does.

You purchase annuities through an insurance company.  Typically, the rates offered by insurance companies will vary, company by company and region by region.  Dealing locally is always the best, as insurance companies in your local area will have a much better feel for what options perform better in your specific area.  Kevin Hargrove, from Boston, Massachusetts, found an insurance agency in his hometown that worked well for him.  He chose a fixed annuity and is very happy with his payments.  His agent explained everything to him in detail and the service was much better than he had expected.

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