it is estimated that more than two
trillion dollars are held in annuities
today in this video we're going to
quickly try to answer a few questions
what is an annuity how can we use
annuities and are annuities a good
investment let's get started so what is
an annuity well an annuity is an
investment type some might even call it
a type of insurance so here's how it
works let's imagine that we are an
investor who wants to go ahead and buy
an annuity as investors in annuities
they might also call us an annuitant or
an annuity owner so here is what we need
to know as far as the basics of
annuities so we go to an insurance
company to buy an annuity and we're
going to have to pay the insurance
company for this annuity they call this
payment the premium we can look at this
as our initial investment the insurance
company will take that premium and
invest it maybe in the stock market
maybe in the bond market or probably
both generally the insurance companies
tend to focus on fairly safe investments
but either way they're going to invest
it
so as the annuity investment account
grows at some point payments are going
to be made to us but how much well there
are a few key factors that will
determine how much we will receive as
the annuity owners first how much time
can the insurance company invest the
money before we expect to receive
payments let's imagine two scenarios in
scenario one we want to start receiving
payments as soon as possible they call
this an immediate annuity and in
scenario two we want to receive payments
in twenty five years when we retire this
is called a deferred annuity so clearly
the payments that we will get as the
annuity owner if we defer twenty five
years should be higher than if we start
receiving payments soon since the
insurance company can invest our initial
annuity premium for longer by the way
this money will grow tax-free for us
until we start receiving payments from
our annuity another consideration for
both scenarios affect how the payments
are determined first we can receive a
fixed payment which means that the
annuity investor will receive a payment
that stays the same every month or every
quarter or every year the frequency is
our choice or we can go with a very
all annuity with a variable annuity the
payments made to the annuity owner will
change generally based on some
underlying factor maybe the annuity is
tied to an index like the sp500 or an
interest rate like the ten-year US
Treasury rate really it could be tied to
anything but we will know what it's tied
to at the start of the annuity before we
buy it now the next question is how many
payments will we get well there are a
few choices here
perhaps we are utilizing this annuity
for retirement and we want the payments
to begin when we're 65 and we want the
payments to last until we pass away well
in this scenario the insurance company
will determine our life expectancy and
will tell us the amount of each of our
payments assuming it's a fixed payment
now that payment will be much higher if
we go for the advanced life deferred
annuity and in that scenario we don't
start getting payments until we are
let's say 85 years old and this makes
sense if we think about it first the
insurance company will expect to make
fewer payments to us and second they're
going to have the money even longer to
invest therefore the investment account
can continue to grow another choice is
for us to pick a certain term maybe we
need payments every month for five years
or ten years or whatever we might choose
so as we could see and the new 'ti has a
lot of choices and they're very
customizable from situation to situation
so are annuities a good investment well
they can be a great investment if they
sit our needs well but there are a few
things that we should be aware of first
oftentimes annuities come with higher
fees perhaps the fee from an annuity
itself is low maybe it's just 10 basis
points which would be the same as 1/10
of 1% on an annual basis but many times
there will also be investment management
fees perhaps there's an insurance fee or
some other benefits fee it really
depends on the situation
often the more we customize it the
higher the fees at the end of the day
annuities can be beneficial since they
have no investment limits like
traditional retirement accounts but they
often come at the expense of higher fees
so if annuities are something you're
interested in be sure to shop around try
to compare the fees try to understand
where the return on investment is going
to come from and what insurance company
is offering them many annuities are not
in fact so if the insurance company goes
under well that could hurt us in a
serious way plus many annuities cannot
be closed early without incurring huge
fees so that should be considered as
well on the flip side a well executed
annuity provides many people with the
consistent payments that they need to
provide them with the stability they've
always wanted and that wraps up the
basics of an annuity hopefully you have
found this video interesting if you did
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you so much and I'll see in the next
video