Why You Should Consider Owning an Annuity As Part of Your Investment Strategy

Most investors are familiar with the idea of utilizing mutual funds to form the basis of their investment strategy. Ask them whether they would consider buying annuities to diversify this strategy and they may well stare blankly at you. This is hardly surprising as a sizable proportion of investment advisors are equally wary of incorporating annuities into their clients' portfolios.

This article will attempt to de-mystify this much under-used form of financial investment by explaining what an annuity actually is and assessing what circumstances, if any, favor their use.

At the most basic level there are two types of annuity, namely immediate and deferred. An immediate annuity involves paying a lump sum to an insurance company that guarantees to repay a fixed amount to the investor every year for an agreed term. The period of time involved will be either your lifetime or for a fixed number of years. Generally your money is not invested in the stock market but earns a small return over the period of annuitization.

If you choose the lifetime option your payments will be based on life expectancy derived from IRS mortality tables. The advantage of this option is that you will receive the guaranteed annual payout even if you exceed the assumed life expectancy period. The downside of this option occurs when you die before the assumed life expectancy period expires, in which case the insurance company keeps the balance of your investment.

A deferred annuity is designed to provide you with an income at some agreed point in the future, usually upon retirement. A major advantage of this option is that you are not liable for tax on the annuity each year allowing you to benefit from a triple compounding effect. Your investment continues to grow untaxed with gains taxed only when you withdraw money from the annuity. Such earnings are treated as ordinary income rather than capital gains.

The three most popular types of deferred annuity are the variable annuity, fixed annuity and index annuity. A variable annuity is essentially a tax-deferred mutual fund with death guarantees built in. This type of annuity is composed of several mutual funds, or sub-accounts, so the value of the variable annuity is dependent on how well these funds perform. The advantage of this type of investment is that the investor's beneficiary will receive a guaranteed dollar amount on his or her death.

Fixed annuities provide the investor with a guaranteed rate over the term of the contract. The rate payable is agreed at the time of purchase and does not fluctuate in response to market conditions. The fixed annuity shares the deferred tax advantages of the variable annuity but the benefit payable on death is limited to the contract value at the time of death. All in all the fixed annuity represents a more conservative form of investment and will therefore appeal to a sizable segment of the market.

Index annuities are a mixture of the variable and fixed versions. Generally, your investment will be tied to the performance of a named index with some downside protection built in to ensure the value of your investment does not fall in any given year. Unfortunately there will also be a cap on how much your investment can earn in a given year. The index annuity may appeal to investors who welcome the opportunity to beat inflation by linking to market growth but also want to enjoy the comfort zone provided by this particular investment vehicle.

Clearly, putting your money into annuities or any other form of investment warrants a great deal of careful consideration. In some circumstances annuities may represent the best option available, but this will not always be the case. Always seek advice and guidance from a qualified expert in this field before investing your money, but don't be afraid to ask relevant questions about the full range of investment options available.

Richard Mitchell owns and operates [http://www.insurancepolicyreport.com/]

This post was made using the Auto Blogging Software from WebMagnates.org This line will not appear when posts are made after activating the software to full version.