Annuities are basically policies or plans that are parallel to life insurance policies; however, a subtle difference between the two can always be pointed out. In case of a life insurance policy, the insured person is protected with the help of what is known as an indemnity for financial drawbacks. The person does have a repayment and death benefit, however, its nature and volume is lower than a regular full-sized life insurance. In very simple words, annuities are good investment options in which you can invest and pay a certain sum every year, or after an interval of few years, to reap the benefit of returns for many years. In some nations, annuities are synonymous to life insurance, and there is no difference pointed out between the two.
As mentioned above, there is a very subtle difference between annuity and life insurance. One very important aspect of an annuity is the returns that it gifts to the owner.
A person who wants to ensure decent earning even after retirement, gets a policy or an annuity. This person, who is the holder, owner, and receiver of the policy, is known as an annuitant. The company which provides the annuity is simply known as an annuity provider.
From the date of commencement of the annuity, the annuitant pays a specified amount to the annuity provider (which is usually a financial institution or an insurance company). The annual payments (also known as premium) span over a number of years. The company deducts some volumes as fees and mortality risk, and then reinvests the entire amount into highly reliable sources, under the supervision of experts. The company or annuity provider pays off a specified amount, which is known as a return, as per a pre-specified schedule to the annuitant. This repayment or returns schedule is mighty long and often stretches out for many decades, ending when you reach a ripe old age. All annuities have a certain death benefit, that is a specified sum would be forwarded to your family upon your death.
Fixed annuities are considered to be the safest. In case of such an annuity, the payment and repayment schedule is fixed, and the death benefit and guarantees are also fixed. Basically all you have to do is continuously keep on making the payments, and then later just enjoy the benefits. The total summation of the annuity is that your whole payment returns to you with mammoth rate of return that sometimes has been as large as 50%.
The second prominent type is variable annuities. In case of a variable annuity, a portion of the payment (premium) that is invested by you is assured for return. The remaining portion is subject to risks from the market and is returned as per the portfolio performance. This kind of policy is thus very effective for good or excellent market situations as the probability of high return over investment is good. Thus, it is assured that you will get your money back along with a portion of profit from the portfolio, and if the portfolio has high profits, then you will also get high profits. In cases where profits are low, your returns will be low. Note that the sum never goes into a negative.
Objectively speaking, an investment is never good or bad, it just that the returns that are obtained from any investment are preferred or not preferred. On the topic of annuity, both types are excellent and great investment and insurance options.