An annuity is a series of equal payments made at fixed intervals of time. Examples of annuities are regular deposits to a savings account, monthly home mortgage payments, monthly insurance payments and pension payments. – Wikipedia
A “deferred” annuity means that the series of annual payments will not begin until a later date. This is popular with retirees because they can defer taxes until annual payments are received. An “immediate” annuity means that the income payments start right away. Some annuity contracts are good for life, so if you live long, then the insurance company must continue to pay you. The insurance companies are basically betting that you will die before the full value of the annuity is paid out. There are two types of Annuity.
- Fixed annuity in which fixed amount is PREDECIDED and you will receive that on PREDECIDED time.
- Variable annuity. The payer will guarantee the minimum amount. At the end of accumulation time, if there is anything above the minimum amount, the payer will pay it.
Why They are alternative investments? Answer is simple. They are not related with general investment markets. May be Dividend paid by any company is looking like variable annuity but it not. It is not mandatory for a company to pay minimum dividend continuously and with same amount. In fact same amount of dividend shows that company is not growing. Debt Investment in bonds and debentures are also not annuity always. They have maturity date. Deep discount bonds are not even paying interest.
So where to find Annuity? Pension plan, some type of Preferred stocks or bonds/ debentures with long maturity date (like 100, 150 years. Yes. They are available in some countries) may looks like annuity payment. Some insurance plans also come into this category. Most annuities are regulated by Govt in related with the country.
Use of Annuity? Reduce risk upto certain level. Capital Appreciation is also one use as it continuously giving you PREDECIDED amount. (Losing your principal in nearly Zero). If you die early only in that case, you will not get full amount. As you know that in any case you will receive that much amount, you are just relax. Mostly they are for the investors who dont want to take big risk. Most of the time they are assume as Retirement plan. One big disadvantage is that inflation is reducing actual value of the money received. Only taht is risk in annuity.
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