Over the years as life expectancy have increased annuities have become more complex. Now there are different types of annuities available that serve different purposes. For example, insurance companies now have the variable annuities that guarantee a minimum payment but have the possibility of bigger payments when the underlying assets grow in value. The money or at least a portion of it can be invested in more risky securities in hopes of generating a higher return.
With longer lives come the increased chance of catastrophic illness and the need for a limp sum of cash. Some annuities now allow the owner to withdraw some or all the principal should the need arise. There are also annuities that continue after the original owners death so that when one spouse out lives the other the income will continue.
There are immediate annuities and deferred annuities. An immediate annuity is where a person pays a lump sum and begins receding payments right away. A deferred annuity is where payments are made into the annuity over a period to build it up and payments are started at an elected time in the future, for example, at retirement age. An immediate annuity is purchased when someone suddenly comes into a large sum of money, for example winning the lottery or a large settlement from a law suite. Differed annuities are much more common as just about everyone tries to save for retirement.
Investors need to decide how much of their portfolio to put into annuities. Some financial planners say to at least cover the basic living expenses with annuities. Others think better returns can be made with stock investments. Ultimately each individual must decide for him or her self and that decision depends on the persons risk appetite. Investors should carefully consider what they need for retirement and how much risk they are willing to take with their investments. The more risk took the higher the possible returns on investments but also the higher the chance of losses and not having what is needed at retirement. Another consideration is the amount of time until retirement. Younger people can afford more risk while persons nearing retirement should lower their risk. With less time until retirement losses incurred are less likely to be regained.
