To begin, let us try to understand what the term annuity means. Let us try to understand this with a simple definition. Annuities are an agreement between purchasers and insurance companies that provide a fixed income stream for a person’s lifetime or a specified period. It can be used as a deposit at the time of retirement. Purchasing an annuity is also very simple. It can be bought with some lump-sum amount or on an installment basis. It can also be purchased paying almost all of it together or paying over time as a saving.
Fixed annuities vs. Equity-indexed Annuities
There are two types of annuities. The first is the Fixed Annuities and the other is Equity Indexed Annuities. With the fixed annuity, the rate of interest is fixed and does not change with time. Therefore, the fund is granted to grow with a specific period.
On the other hand, the Indexed Equity Annuity offers its purchaser the opportunity to earn a higher amount than fixed annuities when the financial markets perform well.
Advantages of Fixed annuities over Equity indexed annuities
The advantages of fixed annuities and equity-indexed annuities are as follows. Fixed Annuities offer many goods features. It provides lifelong income to annuitants. It acts as a permanent saving over some time. You can rely on the amount you receive to play the second innings of life after retirement. Another essential aspect of annuities is that you do not need help in tax calculation. Also with some delay, withdrawal of the saving of tax can be done.
There is a provision of exception in taxes when there is less taxable income through annuities. It is called a tax-deferred status. The Fixed Annuities provide a guaranteed income to the retired person. The rate of interest paid and the monthly payout after a certain amount of time is fixed before the time of purchase of annuities. It makes life easier and more relaxed for the senior person.
Unlike the variable annuities, the rate of interest is not fixed and depends on the market position. When the market is up, the rate of interest can be high, thus yielding more amount, and when the market is down, the rate of interest will be low, thus offering no amount. Therefore, Fixed Annuities offer a definite sum of amount to earn.
Disadvantages of annuities
While the gains are numerous, there are very few cons when talked about annuities. As compared to mutual funds, annuities incur more expense. When purchased through an agent, you will have to pay the amount as the commission, making it more costly. Purchasing the annuities directly from the insurer may be the better option to go with.
You may also need to pay a surrender fee if annuities are withdrawn within a year of purchase. The unique feature of annuities is that it takes time to understand the basics of annuities. Therefore, before buying annuities, one should read and understand all documents before buying it.
