Annuities and Certificate of Deposits are financial investment instruments which have very similar features. Annuities normally require an up-front payment which will be used to provide a series of deferred payments in the future. The way annuities work is also similar to structured payments up to a certain degree. As previously mentioned with annuities an investor provides an up-front payment to a financial institution, then these funds are assigned a fixed or variable growth rate, up until this point is very similar to CD accounts but the financial instrument in question is tax-deferred during the accrual period, meaning that taxes on the earnings will be charged at a later time after the earnings have been realized. Financial institutions or insurance companies agree to pay periodically for the rest of the client's life. As you can now see this last phase is very similar to the way structured settlements work and just like the later mentioned, a beneficiary can be assigned on the account in case of death. Annuities are classified into Immediate Annuity and Deferred Annuity. The first one (Immediate) provide a series of increasing payments until the client dies, this is also known as a pension. Deferred Annuities are classified in Fixed and Variable. Through the fixed type a guaranteed rate is delivered and through the variable type the funds are deposited in separate accounts, the amounts may vary. Through this payment scheme the client is receiving a determined amount of money every month, or however the payment agreement has been arranged. The main disadvantage this financial instrument has is that it is not liquid meaning that if the person decides to withdraw the funds before he reaches a certain age a penalty is charge, just like traditional retirement accounts. If something happens throughout the life of the client and he/she needs to use the funds immediately, there will be several procedures to go through before the funds are received, and most of the time this means that the full value is the instrument is not received because of penalties and taxes As you now realize, there are several downsides to annuity accounts. A good cash out option is to turn this monetary instrument into a lump sum instead of getting small periodical payments. Through a lump sum the funds are available immediately and can still earn interest on liquid certificate of deposit accounts or through any other liquid interest bearing account.
Please Rate this Article 5 out of 54 out of 53 out of 52 out of 51 out of 5
Not yet Rated
