Insurance companies provide annuities to clients to guarantee a continual income through periodic payments over a lifetime. Lifetime annuities can be purchased by a client. The client may render a sum of money to the insurance company that will be divided into a monthly income over the client’s life expectancy. The predetermined amount of money will be distributed income for a lifetime. However, with some fixed term annuities, the insurance company only pays a monthly amount for a predetermined amount of time.
Annuities are available in fixed rate and adjustable interest rates. A fixed rate annuity will allow clients to secure a competitive interest rate for a specified amount of time. Clients may do this by purchasing a CD-Type of annuity. With this type of annuity, clients will enjoy the benefits of tax-deferred savings. When the client is prepared to withdraw the money, then the savings will be taxed. Fixed rate annuities will guarantee that the client will not run out of savings before their life ends. When the client dies, the client may name a beneficiary to claim the deceased’s remaining funds.
Maturity lengths differ with annuities. The longer the money remains in the annuity, the higher the interest rate. For example, a 10 year annuity will yield a 4.1 percent interest rate or a 7 year annuity will yield a 4 percent interest rate. However, a 1 year annuity will yield a lower interest rate at 1.6 percent. The client is guaranteed the specified interest rate if the money is held until the end of the surrender term.
Immediate lifetime annuities are also available for clients. In this scenario, the client begins receiving payments as soon as they make an initial investment. The client will receive monthly payments over a given amount of time. The time periods are typically set at 5, 10, or 20 years. Clients pay taxes on the income as they receive the payments.
Some annuity interest rates are determined by index funds in the S&P 500. Adjustable rate annuities are typically based upon index funds. This type of annuity guarantees a minimum interest rate, but the client may be awarded a higher interest rate depending upon the fluctuation of the market. The guaranteed minimum is typically between 1 percent and 3 percent. Many clients enjoy this type of annuity because the rewards may be higher than fixed rates. However, this type is also riskier because the rates may drop. Clients should study the trends of the market over time to determine if an adjustable interest rate is prudent at the time of investment.
In other annuities, such as fixed rate annuities, interest rates are based upon mutual funds and bonds. Interest rates are a major concern when purchasing an annuity as the client’s investment may not hold the same value as when the money was initially invested. Inflation describes the devaluing of the investment over time. Many clients are concerned that their investment today will not take care of them 10 to 20 years from now. Therefore, lifetime fixed rate annuities are more desirable to clients, because they continue to pay in the event the client survives the initial investment.