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How Do Annuities Work?

As you think about your financial future and how you’ll support yourself during retirement, it’s important to consider various retirement planning strategies, tools, and products. One financial product that can help you to secure a guaranteed stream of income during retirement is an annuity. Here’s an overview of annuity basics and an explanation of how annuities work—for more information, reach out to Top Investment Solutions directly today. 

What Is an Annuity?

An annuity is a contract wherein the annuity holder pays monthly premiums or makes a lump-sum payment in exchange for regular, monthly payments made at a later time. In other words, you—the annuity holder—pay a set amount of money now in exchange for a stream of income in the future

Different Types of Annuities

There are various types of annuities. Common annuity types include:

  • Deferred annuity. In a deferred annuity, the annuity holder puts in principal (lump-sum payment or monthly premiums) now, but annuity payments don’t begin for at least a year in the future, if not longer. 
  • Immediate annuity. Designed for those who need an immediate stream of income, an immediate annuity is an annuity contract that begins paying out within a year or less of the principal investment.
  • Fixed annuity. A fixed annuity is an annuity where the rate of return is fixed and guaranteed. 
  • Fixed index annuity. A fixed index annuity offers a little more risk but also greater potential for reward than a fixed annuity. With this type of annuity, returns are based on indexes but the annuity is not actually invested, which also provides protection from major losses. 
  • Variable annuity. Variable annuities are the riskiest annuity product but also the one that offers the greatest potential return. In a variable annuity, the value of the annuity is based on market rates. 

How Does an Annuity Work?

As explained above, an annuity holder will purchase an annuity in one of two ways:

  • They will make a lump-sum payment to an insurance company, or
  • They will pay monthly premiums for a predetermined amount of time

After the lump-sum payment or series of payments is complete, the insurance company will send the annuity holder either a single lump-sum payment or a series of payments at some point in the future. The payments that you make to the insurance company are investments that can grow in value; then, through annuitization, payments are distributed back to you. 

Call Top Investment Solutions Today

Annuities are complex financial products that are best navigated with the help of a professional. If you have questions about annuities, we recommend reaching out to our team directly. We serve clients nationwide and are accepting new clients.

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