Annuities are popular financial products for a variety of reasons, but most notably because they are designed to provide a steady stream of income over a specified period of time. As such, many people like investing in annuities because of the guaranteed aspect of them. However, guaranteed payments over time doesn’t work for everyone, and so there could come a time when you need to sell.
How an Annuity Works
An annuity works by taking an amount of money up front in exchange for the guarantee of payments for a specified period of time, or in some cases, life. Annuities are an insurance product, and their payments are guaranteed by the insurance company who issues the annuity.
The best way to illustrate this is through an example. You can buy a $1,000,000 annuity today, and it will guarantee you monthly payments of $1,500 per month for life. This is about a 1.8% annual return on your money, which is low, but not terrible. The insurance company makes money by trying to use your initial deposit to earn a better return, and thus pocketing the difference. [Read more…]