What Is an Annuity Contract?
An annuity contract is a written agreement between an insurance company and a customer framing each party's obligations in a annuity agreement. Such a document will incorporate the specific subtleties of the contract, like the structure of the annuity (variable or fixed); any punishments for early withdrawal; spousal and beneficiary provisions, like a survivor clause and rate of spousal inclusion; and that's only the tip of the iceberg.
How an Annuity Contract Works
An annuity contract is a contractual obligation between upwards of four gatherings. They are the issuer (typically an insurance company), the owner of the annuity, the annuitant, and the beneficiary. The owner is the person who buys an annuity. An annuitant is an individual whose life expectancy is utilized concerning deciding the amount and timing when benefits payments will begin and cease.
Generally speaking, however not all, the owner and annuitant will be a similar person. The beneficiary is the individual designated by the annuity owner who will receive any death benefit when the annuitant passes on.
An annuity contract is beneficial to the individual investor as in it legally ties the insurance company to give a guaranteed periodic payment to the annuitant once the annuitant arrives at retirement and solicitations beginning of payments. Basically, it guarantees risk-free retirement income.
An annuity contract may just allude to any annuity.
Annuity Contracts: What to Watch
Annuities can be complex, and annuity contracts may not be extremely useful to numerous investors due to new concepts and phrasing. Keep as a primary concern the accompanying while shopping for an annuity:
- Make certain to comprehend what a surrender period is and the way things are noted in an annuity contract. It is the period during which an annuity owner ought to have the option to pull out the entirety of their money without experiencing a penalty.
- Keep an eye on different tier contracts for pulling out money. Tier 1 takes into consideration withdrawals over a lifetime (or annuitization value — essentially, an immediate annuity payout). Tier 2 might be established if the annuity owner has any desire to accept out their whole balance as a lump sum, in which case the annuity seller might reduce the value of benefits by 10% or even 20%. The key is knowing whether an annuity contract incorporates different tiers and what punishments might be set off if the owner has any desire to liquidate their annuity.
- High teaser rates to energize buyers followed by a wide margin lower rates for the life of the annuity contract. The strategy for getting around this issue is to require the annuity seller to completely reveal the rate they will pay for the life of the annuity.
- Try to buy an annuity that permits a joint annuitant to be named, which gives owners and beneficiaries greater flexibility with withdrawal timing and tax planning.
Annuity contracts have different withdrawal amount arrangements — ensure they are flexible. For instance, most have a 10% withdrawal amount, however if you need to concede and on second thought pull out 20% following two years, ensure that is an option without a penalty (known as cumulative withdrawals).
- An annuity contract can include up to four individuals - issuer (generally an insurance company), the owner of the annuity, the annuitant, and the beneficiary.
- A beneficiary can acquire an annuity contract upon the annuitant's death.
- Frequently the owner and annuitant can be a similar person.
- Annuities are much of the time confounded financial vehicles intended to give lifetime income.