11 July 2010

4 Basic Things You Need to Know About Annuity for Better Investment Decisions

An annuity is an insurance policy in which the money you pay is invested by the insurance company, and after certain period of time, the income made from the investment is paid to you. Some benefits of an annuity are it provides you with lifetime income, offers some inflation protection, it combines insurance and savings, it guarantees returns, and it offers better tax savings. However, investors should always bear in mind that it does not maximize your investment, it requires a large sum of money to invest, and it proves to be inflexible.

Therefore, the comparison between the three background information on annuities below are essential to help you make a better decisions:

1. Annuity explained
There are two basic types of annuities:

1.1 Immediate annuities
Type of payment: a lump sum payment
Period of start receiving time: One year
Advantage: Suitable for who have a large sum of money and want to quickly start getting money they may need.
Drawback: more expensive than Deferred annuities.

1.2 Deferred annuities
Type of payment: either paid in a lump sum or in installments with your returns given out after a stipulated period of time, such as ten years.
Period of start receiving time: over a certain period of time
Advantage: The principal money you have invested here grows tax-free until you decide to withdraw it.
Drawback: inflexible

2. Benefits of annuity
Annuities are becoming increasingly attractive to many investors because of annuity leads generation.
The benefits that annuities provide its holders are as follows:
2.1 Provides you with lifetime income – You will annually receive returns upon retiring
2.2 Combines insurance and savings
2.3 Guarantees returns
2.4 Offers better tax savings.
2.5 Offers inflation protection

3. Drawbacks of annuities
The drawbacks of investing in annuities are as follows:
3.1 Does not maximize your investment
3.2 Proves to be inflexible–The principal amount you paid is held for investment and cannot be get back anytime you want for another investment or purpose.
3.3 Requires large sums of money to invest

4. Investment styles
4.1 Fixed annuities 
Characteristics: a guaranteed and fixed rate of return on investments
Type of annuities: either be immediate or deferred

4.2 Variable annuities
Characteristics: whose returns vary depending on the performance of the mutual funds selected at the beginning of the contract that invests money

Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.

Review by: Xaivier Chia

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Lump Sum Annuity said...

it's really Nice article on Annuity,have some very good points in addition to this i want to discuss some more points regarding Annuity ::-
Is ULIP giving higher returns than Mutual Funds,since close to 30% of our investement goes for maintainace ,morlaity,allocation,annual charges

Lump Sum Annuity said...

I have read your article, I have a question for you. We talk about 2 types of Investments 1. ULIP and 2. Mutual Funds.

When you talk about ULIP, The maintainance Charges ,Morality Charges , Allocation charges come close to 40% of annual PermiumEg.HDFC Pension Plans. Apart from that they charge every year for maintainace.

When you talk about Mutual Funds One time entrance fee of 2.5%, no annual charges.

My question is

1. Is ULIP giving higher returns than Mutual Funds,since close to 30% of our investement goes for maintainace,morlaity,allocation,annual charges

2. What is the difference between Investing in ULIP's with Insurance plans like LIC Jeevan Tarang,Jeevan anand etc.
Lump Sum Annuity

Xaivier Chia said...

Unit Linked Insurance Plan (ULIP) provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time.(Wikipedia)

First of all, let's consider the following questions:
1. Is this kind of insurance plan providing guarantee return?
2. Is there any other service charges such as annual fee, management fee, cash out charge etc?

Personally, I believe that every plan has its drawback and advantage. Therefore, to be a smart consumer, always invest depend on your needs.

Higher the risk, higher the return. Nothing can change this simple nature rule.

Always do your homework instead of simple trust a salesperson to avoid conflict of interest.

Lump Sum Annuity said...

Nice Article, i wants to include some more to this.......

Some of these plans are also growth investment plans with assured Lump Sum Annuity in addition to some health coverage plans, etc. Some investment plans include payment of Lump Sum Annuity to the spouse or any other nominee either at the same rate or at a revised rate.

Well working after retirements is an another option if one really wants to earn money or to increase savings.but it also has some pros and cons.working after retirements totally depends upon individual choice or his/her financial status/position.

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