What is the annuity?
An annuity is a financial product that pays out as a steady stream of income after investment. It is issued and sold by financial institutions they accept the investment funds from individuals and then issue in fixed payment after the retirement. From the fund investment period to before payout begins is known as the accumulation phase. Once the payments start then the period is known as the annuitization phase.
Advantages and disadvantages of annuity:
Advantages of annuity:
- Tax deferral: The amount invested in annuities of any kind grows tax-deferred until it is withdrawn. Annuities have no limits on the amount in the investment and also don’t have an income phase-out schedules.
- Guaranteed payout: Any type of payout the annuitants choose. They can be assured that they will receive monthly payment until they die. Even if the value of the contract completely exhausted.
- Protection from probate and creditor: The creditors are exempted from the annuity contracts and are unconditionally exempted from probate proceedings. The exemptions from creditors may vary from place to other.
- FAFSA asset status is exempted: The annuity need not be listed in the FAFSA form while the students applying for financial aid.
Disadvantages of annuity:
- Costs and fees: Annuity is one of the most expensive investment types in the financial market.
- Liquidity: Most annuity contracts charges stiff penalties for pre-withdrawal.
- Complexity: The annuity contracts are complex in nature, especially in indexed and variable contracts. But it has so many benefits if used correctly.
- Taxation: The annuity withdrawals are taxed as ordinary income, without considering the holding period of the contract.
Types of annuity:
Immediate annuity plans: The plan doesn’t have accumulation phase and it starts directly form vesting phase. It is purchased with a lump sum and the annuity payment and starts immediately.
Deferred annuity: It is the pension plan in which the annuity starts after the certain date. They are different types of annuities in the deferred annuity:
- Accumulation phase: It is the phase starts with investment to the time of paying the first premium.
- Vesting phase: The time from when the investor will receive benefits in the form of pensions.
The components included in the annuity calculator:
- Starting principal: The principal amount invested.
- Annual addition: The amount added to the principal annually.
- Monthly addition: The amount added to the principal monthly.
- Annual interest rate: The interest rate paid annually.
- Time period: The time period the money is the investment.
Using the annuity calculator is used to determine the income payment of an annuity. It includes the accumulation phase and shows growth based on regular deposits.