Author:  Maria Alfano

Annuities explained in layman’s terms are just what you will get here.  Understanding finances and how certain investments work can be difficult if you have never been exposed to them before.  The word “annuities” gets thrown around like a beach ball, but do we really know what it all means?  How do you know what to choose?  Which investment is right for you?  How much do you need to invest?

Annuities can be as simple or as complicated as the provider makes them.  The advisor who explains and sells it to you will also have a hand in the complexity of the annuity.  Arm yourself with some knowledge before taking the plunge.

Do you struggle with financial jargon?  Does making an investment decision cause you heartburn?  You are in very good company.  Financial investment firms make it more difficult than it needs to be so you can depend on them.  Your dependence means they can charge you fees for needing additional services from them.  Get some basic knowledge first.

Annuities Explained in Easy To Understand Terms

You don’t need to fear annuities anymore.  This post will explain to you what an annuity is, how it works, and provide you with some options for investing in annuities.

What Are Annuities

Dictionary.com defines annuities as such:

Now, what the heck does this actually mean?  Annuities explained in simple terms are insurance or saving plans that you pay into on a regular basis.  This insurance company provides you with the comfort or stability that you will not outlive any savings you have accumulated or pensions you may be collecting.  The amounts you pay into the fund are converted to payments that could last you for the balance of your life.  You will never run out of money when you contribute to an annuity.   Consider this as a long-term contract between yourself and the insurance company of your choice.  They promise to pay you a monthly stipend when you are ready to draw from the plan and you promise to make regular deposits to the fund for the length of time stipulated in the contract.

Like any other form of investment, there is the risk that your chosen plan could lose value.  Depending on your risk tolerance, you could be depositing more into the plan than your eventual payments are worth.  But, don’t worry, annuities come in different forms and you have the power to limit your risk.  Before you sign on the bottom line ask questions.  Be sure to get all your questions answered to your satisfaction.

What will be the basic value of the plan based on how much you will deposit into it?

Will there be any fees the insurance company levies to manage your plan?

Have them clearly define the benefits of the plan.

What are the guarantees provided in the contract?

Why Annuities

Have you always contributed the maximum amount each year to your tax-saving retirement funds?  Were you looking for ways to save more money?  Looks like annuities can be the thing for you.  When looking for the right plan you need to know your budget.  Understand what you need and what you want to live comfortably in the sunset period of your life.  The more information you can provide to your insurance representative, the better the plan they can suggest and design for you.

Annuities do not replace your retirement plan.  Instead, they provide a supplement to your retirement.  Don’t let anyone talk you into or out of an annuity.  Gather all the information from a few providers before you make up your mind.  Only you know how much you can afford or want to put into the savings plan.  If you have a large amount of money you can make a lump sum (bulk) payment to the fund instead of making monthly payments.

With a lump sum payment into the plan, you can start withdrawing or receiving monthly payments within 30 days.  Those making monthly payments will need to satisfy the amount in the contract prior to receiving monthly payments.

Types of Annuities

There are 4 main types of annuities that range from low to high risk.  Depending on how secure you are with your ability to make riskier choices, the end result could be quite lucrative for you.  If you don’t have a lot of years ahead of you, or if losing money is not your cup of tea, then you may want to choose something safer.  There is always the option of mixing the plan with the different types of annuities to reduce your risk and increase your returns.

Less Risky

Fixed-rate is the safest of the options.  The insurance company gives you a fixed rate of interest on your money.  Since they are based on market interest rates, they are not dependent on what happens in the stock market.  It doesn’t matter if the stock market soars or it crashes.  You receive the rate stated in your contract.  The rates range between 1% – 3%.  Read your contract carefully as the interest rates could be subject to change on the anniversary of your contract.

Immediate annuities require that you put in a large sum of money into the plan right away.  No additional monthly payments are necessary.  You can start to draw monthly income after 30 days.  The funds will be locked in.  Even though it is your money, you will no longer have that large sum available to you in case of emergencies.  You can, however, make the funds payable to a beneficiary should you pass on prior to using it all up.

Riskier

Variable-rate works like a variable rate mortgage.  You are essentially gambling on the interest rates.  They could go up or down.  If rates go up you benefit from a higher payment.  When rates go down, you will lose out.  The variable interest rates follow what is happening in the marketplace.

Deferred plans allow you to make one large payment or monthly payments into the annuity in order to make monthly withdrawals in the future.  You can choose to have your deferred plan be fixed, variable, or a combination of both.  This has the potential to grow your money.  For example, making a $10,000 deposit into an annuity at a fixed rate of 2% can yield you up to $12,459 in 11 years.

In Summary

Annuities explained in simple terms are a way to save money for your retirement that goes beyond any 401K or RRSP (Canada).  Annuity retirement plans offer additional security to support your lifestyle.

We would love to hear from you.  Was this article helpful?  Are you able to make an informed decision based on the explanations above?