People are confused about the annuities definition because the exact same word is applied to many various kinds of financial instruments. This short training will hopefully end the actual confusion.
Deferred annuities definition are term deposits with insurance companies. They are similar to certificates associated with deposits at the bank. (Be aware: Bank deposits are FDIC-insured even while annuities are guaranteed by the issuing insurance company.) There are two annuities definition that apply to deferred annuities: fixed and variable. The annuities definition for fixed annuities:
- Your principal is guaranteed. It'll never decline. It could, even so, be eroded by surrender charges (early withdrawal fees) and, obviously, by withdrawals you make.
- The insurance company provides interest to your deposit each year (with regards to the formula, the interest added could possibly be zero but in every case we have seen, there is a minimum guarantee, typically 2.5%).
- The annuity is for a specific time period that you select -generally, the longer the term, the higher the interest.
- All interest is tax-deferred. You do not document it on your tax return until finally withdrawn.
- You may withdraw 10% of one's balance annually without any surrender charge. This is a common feature, and your withdrawal privilege will vary from company to company.
- Inherent in the annuities definition for fixed annuities is an attractive first-year rate with the rate changing each year. A number of companies offer a locked-in rate for the entire term of the contract.
A different sort of annuity is called a variable annuity with the only similar aspect in its annuities definition is that the gain or income is tax deferred until withdrawn. With this type of annuity, rather than acquiring interest from the insurance company, your money is allocated into investment accounts offered by the annuity company. With a variable annuity, you can earn greater amounts than a fixed annuity, or you could lose principal, depending on the investment options the you select and how the financial markets perform. "Risk" is an inherent component of the annuities definition for variable annuities.
A type of deferred fixed annuity, but having some characteristics of a variable annuity is the indexed annuity. It has a annuities definition that's a hybrid: your current principal is guaranteed much like the fixed annuity, but your interest each year is based on increases in a financial index (for example, the actual S&P 500 index). So, your interest can be tied to performance in the index, nevertheless, you can never lose principal as a result of index performance. (You can lose principal to surrender charges incurred if you make withdrawals prior to the end of the contract term). Index annuities are generally be subject to a lengthy surrender charge period. Furthermore, purchasers of equity indexed annuities do not get the entire rate of return from the related index, as there may be a cap or perhaps limited participation for each annuity regarding the index-linked rate of return. Further, as with traditional fixed annuities, this kind of annuity generally guarantees that an investor a minimum rate of return (e.g. 2.5% simple interest) in the underlying index does not increase during the annuity term.
Everything discussed up until now describes accumulation phase of the annuity. The annuities definition of "accumulation" is the period when your investment grows, prior to your taking distributions. The build up phase typically interests men and women saving for retirement or socking cash away for the future. During the accumulation phase, your interest grows tax-deferred inside annuity. Withdrawals are taxable.
How do you get your money out? Let's turn to annuities definitions for the distribution or annuitization phase of the annuity. After the term, you have a few possibilities:
You can leave the annuity alone and continue to let it grow. Numerous companies may force you to take distributions or annuitize at a specific age, typically 85.
You can exchange the annuity to a different company that may pay you a higher rate, as well as offer you a preferable structure.
You can make withdrawals as you desire and treat the annuity as an open contract.
You can annuitize your annuity - trade in your built up balance for periodic payments to get a specified term of years (e.g. 10 or 15) or lifetime.
Now that you have the basic types of annuities defined and a definition for the major terms affecting annuities, your half way to being an expert!