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What is an Annuity? Are Annuities a Good Investment? Basics of an Annuity, a Whiteboard Animation - YouTube
Channel: Learn to Invest - Investors Grow
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it is estimated that more than two
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trillion dollars are held in annuities
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today in this video we're going to
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quickly try to answer a few questions
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what is an annuity how can we use
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annuities and are annuities a good
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investment let's get started so what is
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an annuity well an annuity is an
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investment type some might even call it
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a type of insurance so here's how it
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works let's imagine that we are an
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investor who wants to go ahead and buy
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an annuity as investors in annuities
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they might also call us an annuitant or
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an annuity owner so here is what we need
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to know as far as the basics of
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annuities so we go to an insurance
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company to buy an annuity and we're
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going to have to pay the insurance
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company for this annuity they call this
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payment the premium we can look at this
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as our initial investment the insurance
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company will take that premium and
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invest it maybe in the stock market
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maybe in the bond market or probably
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both generally the insurance companies
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tend to focus on fairly safe investments
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but either way they're going to invest
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it
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so as the annuity investment account
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grows at some point payments are going
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to be made to us but how much well there
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are a few key factors that will
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determine how much we will receive as
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the annuity owners first how much time
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can the insurance company invest the
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money before we expect to receive
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payments let's imagine two scenarios in
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scenario one we want to start receiving
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payments as soon as possible they call
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this an immediate annuity and in
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scenario two we want to receive payments
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in twenty five years when we retire this
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is called a deferred annuity so clearly
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the payments that we will get as the
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annuity owner if we defer twenty five
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years should be higher than if we start
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receiving payments soon since the
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insurance company can invest our initial
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annuity premium for longer by the way
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this money will grow tax-free for us
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until we start receiving payments from
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our annuity another consideration for
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both scenarios affect how the payments
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are determined first we can receive a
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fixed payment which means that the
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annuity investor will receive a payment
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that stays the same every month or every
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quarter or every year the frequency is
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our choice or we can go with a very
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all annuity with a variable annuity the
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payments made to the annuity owner will
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change generally based on some
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underlying factor maybe the annuity is
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tied to an index like the sp500 or an
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interest rate like the ten-year US
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Treasury rate really it could be tied to
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anything but we will know what it's tied
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to at the start of the annuity before we
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buy it now the next question is how many
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payments will we get well there are a
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few choices here
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perhaps we are utilizing this annuity
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for retirement and we want the payments
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to begin when we're 65 and we want the
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payments to last until we pass away well
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in this scenario the insurance company
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will determine our life expectancy and
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will tell us the amount of each of our
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payments assuming it's a fixed payment
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now that payment will be much higher if
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we go for the advanced life deferred
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annuity and in that scenario we don't
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start getting payments until we are
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let's say 85 years old and this makes
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sense if we think about it first the
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insurance company will expect to make
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fewer payments to us and second they're
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going to have the money even longer to
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invest therefore the investment account
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can continue to grow another choice is
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for us to pick a certain term maybe we
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need payments every month for five years
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or ten years or whatever we might choose
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so as we could see and the new 'ti has a
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lot of choices and they're very
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customizable from situation to situation
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so are annuities a good investment well
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they can be a great investment if they
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sit our needs well but there are a few
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things that we should be aware of first
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oftentimes annuities come with higher
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fees perhaps the fee from an annuity
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itself is low maybe it's just 10 basis
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points which would be the same as 1/10
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of 1% on an annual basis but many times
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there will also be investment management
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fees perhaps there's an insurance fee or
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some other benefits fee it really
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depends on the situation
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often the more we customize it the
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higher the fees at the end of the day
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annuities can be beneficial since they
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have no investment limits like
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traditional retirement accounts but they
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often come at the expense of higher fees
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so if annuities are something you're
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interested in be sure to shop around try
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to compare the fees try to understand
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where the return on investment is going
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to come from and what insurance company
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is offering them many annuities are not
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in fact so if the insurance company goes
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under well that could hurt us in a
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serious way plus many annuities cannot
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be closed early without incurring huge
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fees so that should be considered as
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well on the flip side a well executed
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annuity provides many people with the
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consistent payments that they need to
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provide them with the stability they've
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always wanted and that wraps up the
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basics of an annuity hopefully you have
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found this video interesting if you did
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please hit the thumbs up and don't
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forget to hit the subscribe button thank
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you so much and I'll see in the next
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video
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