A Comparison of Annuities
- Life annuities provide payment every year the annuity holder is alive. The payments are calculated in a similar fashion to life insurance policies, as actuaries calculate how long the annuity buyer is expected to live to set a value for the annuity. Life annuities are popular investments for retirement, as the continual income is similar to a pension. The retired policy holder will receive payment every year, which allows him to have an income after he can no longer work.
- There is a difference between a normal annuity and an annuity due. In a normal annuity, the first payment is at the end of the period, often a year. This makes the value of this first payment dependent on the time value of money, as it implies an interest rate that can be compared to other investments. With an annuity due, the first payment occurs immediately, so no additional interest is calculated for the first payment.
Benefits of Variable Annuities
- The SEC mentions one type of annuities termed variable annuities. According to the SEC, variable annuities have several characteristics. Variable annuities are a form of life annuities that provide a death benefit. Not only do they provide income while the holder is alive, they also provide a payment to the survivors of the holder, or any person or organization that the holder has designated. Variable annuities also provide tax benefits. The value of the annuity payments is deferred. Deferment means that the annuity payments are not taxed until the holder receives them. This is useful since the holder will receive many of the annuity payments after retirement, and without income from a job the income tax rate will be much lower.
Drawbacks of Variable Annuities
- Variable annuities also have drawbacks. According to Smart Money, they are not appropriate for many investors. Variable annuities have several penalties that are common to other long-term investments. Surrender fees can be large if you need to withdraw money from the annuity soon after you purchase it. The holder also faces tax penalties if money is withdrawn before the holder reaches retirement age.
- Fixed annuities are also offered. According to Charles Schwab, fixed annuities provide the deferment advantages of variable annuities while reducing risk by providing a fixed payment each period. As with variable annuities, fixed annuities can be funded from several sources, including paycheck deductions and lump-sum initial investments.