While many people prefer to invest in stocks, bonds or mutual funds, some choose to invest in annuities. Investing in an annuity has many advantages as well as disadvantages. Some people say it is safer than investing in stocks or other investment choices while some people disagree. Let us first understand the annuity definition. An annuity is a financial product issued by an insurance company. It is a contract between you and the insurance company. You basically give the insurance company money and they will, in turn, pay out income to you sometime in the future. Annuity payments are often spread over years. The money you contributed in the annuity may accumulate tax deferred which means your contribution is not taxed until you take out your money.
Not all companies offer the same types of annuities. Some people like to put their money in fixed annuities, some like variable annuities more and some like to invest in an annuity index. As with all types of investments, there are different levels of risk associated with investing in different types of annuities. The higher the level of risk you are willing to take on, the more your annuity account will grow if the market is favorable and your annuity investments are in the right places. But, lots of people invest in annuities because they want to invest in something safer than stocks or mutual funds, hope to get the tax benefits and like many of the guarantees that the insurance companies throw in.
The income you will receive from your annuity can be in a single, lump sump payment, monthly payments, quarterly payments or yearly payments. You have a say in how large each payment will be or how long you want to receive payments for. Some people choose to receive payments for life whereas others may prefer receiving large payments for fewer number of years. While payments are guaranteed to a certain extent, there are a lot of expenses you will have to pay to the insurance company for the guarantees they give. This is the key reason why a lot of people say annuities are expensive investments.