Featured Investment: Annuity

Investments are what trading is all about. And knowing about the various available investment options and how to trade them is one of the keys to a successful trading career. In this tutorial, we will be tackling the most famous investments and everything you need about them.

Annuity is an investment where an insurance company or other financial institution collects fixed-amount payments from an individual annually over a specified period of time. The collected money will then be streamed with earnings and principals depending on the annuity contract back to the individual upon ‘annuitization’ or the maturity period of the investment. This investment is primarily for individuals who want to have a steady flow of cash upon retirement.

There are two ways of payment method in annuity: the deferred annuity and the immediate annuity. As their name implies, deferred annuity means that the annual payments will not start until a deferred date with advantages such as deferred taxes for retirees. It enables you to revel in the benefits without being bothered by tax implications through compounding. Meanwhile, immediate annuity means that the payments will begin as soon as the contract takes effect. The catch is for you to live long to take advantage of annuities.There are kinds of annuity that are life-long which may mean a life-long of annuity returns if you live long. In essence, the financial institutions that offer annuity is betting that you will not live long enough to recover the value of your annuity.

Types of Annuity

Fixed Annuity is where the financial institution makes fixed dollar payment s to the investment holder as per the contract which is generally up until the holder’s death. The financial institution pays the earnings and principal that may be used as a fixed investment income.

Variable Annuity is where the financial institution makes a minimum payment and a dependent-on-performance income at the end of the accumulation phase. The income you receive will depend on how the annuity investment portfolio of stocks, bonds, money market fund, and any of their combination performs.

How to Trade Annuity

You can avail of annuities mostly through insurance companies, brokers, and banks with a typical minimum investment of $1000 and the purchase fees. Purchase fees may take up as much as 1.5% of the total investment.

Advantages and Disadvantages

Annuities have a relatively-low risk compared to other available investments as this investment is regulated by the government. Deferred annuities can appreciate tax-free until annuitization. The low risk and the decent rate of capital appreciation are advantageous however, you must take into account the time it takes for annuity to mature. You must consider your lifespan. Also, fixed annuities are vulnerable to inflation risks as there is no adjustment for runaway inflation. In any case, annuities are good long-term investments as it even allows you to withdraw principal that may be subject to penalties. Just make sure that the financial institution offering the investment is insured.