HomeAlthough annuity might be just one form of investment, it carries various types and varieties that are sure to meet different needs of different investor groups. Choose the one that meets your need the best. It is better to analyze the benefit derived and match it with the requirement, before you finally decide to get one.
Different types of annuities are as under:
Level Annuity: This type of annuity will provide fixed income each year to the annuity holder, for the rest of his life. The value provided by level annuity is higher in the initial years than in the later years. This is because of the time value of money concept. Since the returns provided are not adjusted for inflation, the value of money in early years will be higher than those given in later years.
' Pros: Safest form of investment. The return does not get impacted by economic turmoil or recession.
' Cons: Level annuity does not account for inflation. Thus, the money power reduces over time and things that you could buy with the income from level annuity become smaller and smaller. To exemplify, if you could 10Kgs of rice with annuity income in 2005, now with the same income you could buy only 8Kgs.
Increasing Annuities
The premiums provided in this annuity do not change over the life of the contract. The death benefit keeps on increasing with the passage of time. The increment is in form of a % of the face value of the policy. Increasing annuities are used by insurance companies to provide benefit of increase in the inflation rate to the policy holders. .
Investment Linked Annuities
These annuities involve an inherent risk factor and are thus suitable for people who like to take some extra risk to earn little extra income in future. Thus the returns that you would receive are not fixed. It is not possible to determine the size of return either.
' Pros: There is possibility of earning higher income as compared to other annuity investment mediums.
' Cons: It might not be appropriate to link your retirement annuity income to the fluctuation in the stock market.
Annuities with Profit option:
Here your return or annuity income is linked to the performance of the chosen insurance company. Thus, if the insurance company with which you hold the investment does well, you tend to gain. Having said so, your income is not solely dependent upon the profits of the insurance company. There is some minimum income set beyond which the performance of the insurance company will drive your income. The minimum income set depends upon the prevailing market conditions and provide an assured amount. Additional income is dependent on the bonuses declared by the insurance companies. Such bonuses can be announced either once in a year or semi-annually.
You have the option of choosing the rate of bonus as well. If you choose a higher rate of bonus, you will have smaller amount of starting income / minimum income.
