What is an annuity?
An annuity is an investment that trades an investor a monthly payment over time for a lump sum payment. The monthly payment that the annuitant receives is based upon the size of the lump sum that is received at the beginning of the term. It is also based upon the interest that is earned on that lump sum while it is untouched.
There are many different kinds of annuities that are useful for different types of investors. The basic types include the following:
The deferred vs the immediate annuity
When an investor chooses to receive monthly payments from an annuity, he or she can choose to receive those payments immediately upon the deposit of the lump sum (an immediate annuity) or to wait for a while so that the deposited sum can earn interest (a deferred annuity).
The variable vs the fixed annuity
Annuities, if they are deferred, grow at different rates. The fixed annuity pays the account of an investor a set interest rate no matter the macroeconomic conditions. A variable annuity pays an investor partially or wholly based upon the performance of underlying investments in a basket as chosen by the annuity manager or management team. Annuities can also lose money in this fashion similar to a mutual fund account.
There is also an investment known as a hybrid annuity which combines the best features of a fixed annuity and a variable annuity. There is still an opportunity for an investor to profit from smart investments in an annuity basket; however, the hybrid annuity also creates a fixed interest floor that serves as a minimum interest payment for an annuity. In return, the annuity manager usually receives a higher fee from positive returns. The investor may also lose the right to the full scope of positive returns from good investments.
How to Pick the Best Annuity
In order to pick a solid annuity, the factors that should be considered are as follows:
- The health of the insurance company
Annuities rarely lose all of their value unless the insurance company that is underwriting it goes under. With this in mind, it is good practice to make sure that you trust the underlying insurance company that is offering the annuity before you invest in it.
- Ratings of the annuity
There are various organizations that rate the soundness of annuity investments including companies such as Barron’s and Forbes. Looking to invest in annuities that have been properly vetted by long standing market watchdogs is a great way to protect yourself from dogs in the market.
- Options and Rates
Just like stocks, annuities have options and rates. The more volatile these options, the more volatile the annuity will tend to be. However, more volatile options on an annuity can also lead to bigger variable interest payments.
Current Annuity Rates and Trends
There are different benchmark rates for each of the different kinds of annuities. Currently, because of the continued quantitative easing that the Federal Reserve is imposing on the currency, annuity rates are falling across the board. The trend, however, is for these rates to be much more stable in the variable market than ever before, not only because of inflation, but also because of an SEC investigation and proposed legislative changes that may make it harder for individual investors to opt out of long term investments when they become volatile.
Highest Paying Annuities
Some of the top rated annuities include Lincoln National, Guardian Insurance, New York Life and Mass Mutual. Companies such as this tend to have top annuities across the different four forms (variable, fixed, deferred and immediate).