Dealing with Complexity
Understanding the vast number of different annuity product types and features can be mind numbingly complex for both consumers and financial advisors.
The point of this section is to provide a basic overview and a starting point for understanding the pros and cons of the various types of annuities.
A great way to start is by remembering the simple fact that all annuities share three common features, and that variations in these three features are what create different product types.
Annuity Basics
All annuities have the following three features in common:
- Money goes into the annuity—from you (the consumer) to the insurance company.
- That money stays with the insurance company for some period of time and does something while it is there.
- The money comes back from the insurance company to you.
(1) How Does the Money Go In?
Your money can go in all at once or in a series of periodic payments.
(2) What Does the Money Do While it is There?
One way or another, the money will be invested and working while it is with the insurance company. The way in which the money is invested determines how it can grow and ultimately what will come back to you:
- Is the money invested by the insurance company?
- Is the money invested by you?
- Does the money grow at a fixed or guaranteed rate?
- Is the rate of return variable?
- Are rates of returns variable with some sort of guaranteed minimum return?
(3) How Does the Money Come Out?
In other words, how is the money paid-out or distributed to you as income:
- How much and how is that amount calculated?
- Do payments start right away?
- Do payments start sometime in the future?
- Does the payout last for a lifetime?
- Does the payout only last for a certain period of time?
- Who is being paid—just yourself or you and someone else?
- Does the payout include life insurance?
- Is the payout optional?
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