Insurance annuity
Insurance annuity has been described as an investment product sold by the insurance companies that helps people in getting desired returns. When a person goes for buying insurance annuities, he has two choices. He can buy annuities with immediate or deferred payout and he can choose from fixed or variable returns. If a person chooses insurance annuities with immediate payout, payments start immediately after the purchase of annuity. In case of deferred insurance annuities, investor receives payment after a period of time.
There are basically two types of insurance annuities offered in the market. These are fixed annuities and variable annuities. In case of fixed insurance annuities, fixed returns are offered to investors by investing the sum in low risk securities. These include government bonds etc. In case of variable insurance annuities, returns offered are dependent upon the performance of funds, which are also called as sub-accounts. In this case, sum obtained from investors is invested in high risk securities like stocks. Let us learn more about these insurance annuities.
Fixed and variable insurance annuities
By purchasing fixed insurance annuities, a person ensures that he is paid a fixed amount at regular interval by the insurance company. This amount can be used for any purpose. By going for SPIA or single premium immediate annuity, a person receives payment at fixed rate immediately whereas in case of SPDA or single premium deferred annuity, a person receives payment at fixed rate after a certain period of time. Many people buy SPDA insurance annuities for getting a regular income after retirement. Above insurance annuities can be turned into tax deferred investments. A person can specify a fixed period for which payment would be made.
These payments include principal amount as well as interest amount. If a person wishes, he can also tell the provider of insurance annuities to offer the payments up to his death through Annuitization. However, heirs do not receive any money after the death of investor. It has been observed that fixed insurance annuities have many surrender provisions that prevents a person from withdrawing money for a definite period of 5 or 10 or even more years. Amount that can be withdrawn by person differs from one insurance company to another but generally, up to 10% of principal amount can be withdrawn in case of fixed insurance annuities. If any person is worried about loss of his capital due to any reason like lawsuit, it is better if he goes for fixed insurance annuities.
Variable insurance annuities are basically insurance contracts that are used as tax deferred saving vehicles. Main feature of these insurance annuities include tax deferral on earnings, naming of beneficiaries in case of death, ability of receiving payments for life, and the guarantee that has been provided in the insurance component of contract. Since there is no fixed rate of return, a person receives variable payments. As said above also, this investment product has been designed as a retirement saving plan. Like in IRA, investment made by a person grows in a tax deferred manner. Thus, no gains made are taxed until a person withdraws them. Two reasons why variable insurance annuities are considered better than IRA is that money put in annuity is not deductible from the taxes of a person and there is no limit for investing money. This is the reason why it is said that variable insurance annuities are one of best investment vehicles for those people who have lot of money and wish to save good for their retirement.
Other aspects
There are many other aspects attached with insurance annuities that must be understood before buying. Most asked question is that if a person should go for insurance annuities or not. As a basic answer to this question, it can be said that decision should be taken by a person by considering the benefits that are paid by annuity and the cost of insurance coverage. If experts are to be believed, they think that going for insurance annuity is not a wise decision. In fact they feel that it is a poor choice to go for insurance annuities, when these are examined closely. Variable insurance annuities have been described as very profitable for those companies that sell these.
But for people, they are not good, when compared to investments made in equity index fund. It is important to understand here that index tax funds are very tax efficient and offer better tax situation to an individual. Other aspect that should be understood with respect to insurance annuities is Sales Load. In most of cases, insurance annuities are offered with sales loads and also have high expenses. There are also charges regarding mortality insurance and these have to be born by the investor. In some cases, expenses can turn op to 2% of even more on annual basis. As far as insurance attached with annuity is concerned, it has been described as worthless. This is because it comes into picture when a person dies or when the investment goes down.
Other reason for which insurance annuities have been criticized is that in most of cases, funds in which annuities are invested are difficult to analyze. This is because of lack of independent reports. However, there are some insurance companies that offer insurance annuities along with portfolio information. This helps investors in making analysis of insurance annuities contracts. But these contracts are difficult for a normal person to be understood.
Apart from insurance companies, banks are also offering annuities as investment products. For offering these services, banks have partnered with leading insurance companies in the world. In past few years, banks have been able to sell lots of insurance annuities to investors by acting as an agent. Some questions that must be resolved before obtaining insurance annuities from bank are- Why should a person get insurance annuities? What is the difference between insurance annuities and other instruments like money market funds, savings etc? Is there any commission charged by the bank?
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