3.9:
Annuity
An annuity is a series of payments made at equal intervals.
It can include regular deposits into a savings account, monthly mortgage payments for a home, monthly insurance, and pension payments.
Annuity payments or deposits may be made monthly, quarterly, yearly, or at any other regular interval.
Consider Ryan, who takes out a mortgage to buy a house.
Ryan takes out a two hundred thousand dollar mortgage with a four percent fixed interest rate for thirty years and agrees to pay back the loan amount plus interest in monthly installments.
These monthly payments are considered an annuity.
At first, Ryan's payments primarily cover interest, but gradually, more payments go toward repaying the loan principal and less toward interest.
This is because interest is calculated based on the remaining balance of the loan.
The annuity concept helps borrowers like Ryan understand how their monthly payments are set up and how the timing of these payments impacts the total amount they repay over the loan's duration.
3.9 Annuity
The two primary types of annuities are fixed annuities and variable annuities. Stable, unchanging payments are offered by fixed annuities, aiding in budgeting and financial planning. Payments that fluctuate based on investment performance are provided by variable annuities, making them popular for retirement planning.
Eligibility for annuities depends on their type and purpose. A stable income and good credit are usually required for fixed annuities. Growth-seeking individuals willing to accept investment risks are better suited for variable annuities.
Annuities benefit individuals desiring a reliable income stream, especially in retirement. They are also suitable for those preferring a structured way to manage their finances and needing assistance with long-term financial planning. Additionally, annuities can provide tax advantages, as the earnings on the invested money grow tax-deferred until withdrawn.
Various features are offered by annuities to meet different financial needs. These include fixed and variable payment options, deferred and immediate payouts, and returns linked to market performance. Annuities can also provide protection against inflation, customizable payment plans, lifetime income, death benefits for beneficiaries, and flexible access to funds.