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What Annuity Is All About Understanding annuity is likened to a forced savings with interest earnings, which is sold and financially managed by a financial institution, either life insurance companies or investment companies, to individuals, in which the process is designed to accept funds from the individual and allow the financial company to let the funds grow at a specific period of time and through an agreed term and conditions and finalized through a contract, such that when the agreed time has been completed, the life insurance or investment company starts providing an annuity payment to the individual. Annuitization is the process when the funds of the individual, also called annuitant, is being converted into an annuity investment for the funds to grow and earn income for a specific and agreed period of time, and once annuity payments to the annuitant begins, the contract is said to be in the annuitization phase. Examples of annuities are pensions and Social Security which provide a lifetime guaranteed annuities that pay retirees a steady cash flow until they die. Annuities, depending on the annuitant, may be annuitized, meaning the funds are being converted into investments to earn, for either a specific period of time or for the entire life of the annuitant, such that the annuity payment may only be made to the annuitant or to the annuitant’s surviving spouse in a joint life arrangement or the annuitant can arrange for beneficiaries to receive a portion of the annuity balance upon the death of the annuitant. Annuities were designed for an individual to have a reliable means of securing a steady cash flow during his/her retirement years and to alleviate fears of a longevity risk or outliving one’s assets. Further, annuities may also be considered to convert a substantial lump sum into a steady cash flow for those winners of lotteries or to those who received cash settlements from a lawsuit. Depending on the details and factors, annuities can be structured in a variety of ways, for as long as the terms of the duration of time that payments from the annuity can be guaranteed to continue, and these are: annuities can be structured so that payments will continue for as long as either the annuitant or his/her spouse (if survivorship benefit is elected) is alive; annuities can be structured to pay out funds for a fixed amount of time, like 20 years, regardless of how long the annuitant lives; annuities can be structured in such a way that annuity payment can begin immediately upon deposit of a lump sum; annuities can be structured as deferred benefits; and annuities can be structured as either fixed or variable.
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Fixed annuities are structured to provide regular periodic payments to the annuitant, while variable annuities allow the annuitant to receive a greater, future cash flow if the investments of the annuity fund do well and smaller payments if the investments are earning low; however, the advantage of a variable annuity is that it allows the annuitant to reap the benefits of strong returns from their fund’s investments. Due to the market risk which a variable annuity can carry, the annuitant may allow a riders option with its features in his/her annuity for an extra cost, such that the new annuity contract can function as a hybrid fixed-variable annuity. These riders may be also structured, depending on the need of the annuitant, such as: the annuitant can benefit from an upside portfolio potential while enjoying the protection of a guaranteed lifetime minimum withdrawal benefit if the portfolio drops in value; the annuitant may use the riders as a death benefit in the contract or accelerate the pay outs if the annuitant is diagnosed with a terminal illness; cost of living riders adjust the yearly base cash flow when there is inflation.A Beginners Guide To Businesses