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What is an Annuity? Are Annuities a Good Investment? Basics of an Annuity, a Whiteboard Animation

[VidSitePro id=94 ]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 please hit the thumbs up and don’t forget to hit the subscribe button thank you so much and I’ll see in the next video

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