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Annuity
Annuity is a contract between you and your insurance company where by you agree to pay the principal, in a lump sum or a little at a time, in order to receive fixed or variable payments over time. Annuity functions somewhat like a retirement fund. However, unlike a retirement fund, there is no limit on how much you can put into an annuity.
There are different types of annuities. Some offer fixed payments, while others offer variable payments. Whether your payments are fixed or variable is dependent upon the types of investment your insurance makes on the money you put into your annuities. Fixed annuities are invested primarily in low-risked types of investment such as government securities or high-grade corporate bonds. Like investing in a CD or a government bond, fixed annuities offer a guaranteed rate over a period of one to ten years. Fixed annuities are not regulated or guaranteed by the Securities and Exchange Commission, or the SEC. On the other hand, variable annuities allow you to invest in selections of sub-accounts like money market accounts, in which the rate of return will fluctuate depending upon the market performance. The SEC regulates this type of annuity.
A special type of annuity called equity-index annuities is when you make lump sum or a series of payments to your insurance company and they give you a return payment or payments based on an equity index, such as S&P 500 Composite Stock Price Index. The insurance company will guarantee a minimum return that varies from company to company. You may receive a series of payments under the terms of your contract of you may request to have a lump sum return.
Different annuities function differently when it comes to withdrawal. Some allow you to withdraw up to 15% of the principal or the interest earnings without any penalty. Some will not and any withdrawal is subject to taxes and 10% penalty like a retirement fund’s penalty if taken out before that age of 59 and 1/2.
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