An annuity refers to a lump sum of cash invested by an individual that pays out a fixed stream of income for life or for a fixed period. If an investor starts to receive the income immediately, that will be an immediate annuity, and if the investor will receive money in the future, then that is a deferred annuity. Financial institutions create and sell by accepting and investing funds from individual investors and then, upon annuitization (when payments start), issue a stream of payments at a fixed or later point in time (the accumulation phase). Investment companies and life insurance firms are the two common financial institutions that sell annuities to individual investors. But who can buy annuities? Is it advisable for young people or elderly ones? In the case of immediate annuities, an individual of any age can purchase, especially those who receive a large lump sum of money and fear that they can spend it in a short period. These individuals can opt to have future cashflows by purchasing annuities.
A good example of an annuity is permanent life insurance. After an individual purchases his or her policy, they wait for a certain period for adequate cash value to accrue after borrowing against the savings portion of a permanent life insurance policy. The terms are that the policy, together with all overage, will be terminated if the sum of the unpaid interest on borrowing, together with the remaining balance, surpasses the sum of an individual’s policy’s cash value. Cash value growth is largely based on a tax-deferred plan, implying that one receives payments without incurring any taxes in any given active policy. As long as one adheres to a firm’s premium limits, money can be withdrawn from the policy without paying any taxes because the policy borrowings are not taken as taxable income. Parents who anticipate paying college fees for their children or even grandchildren in the future can take permanent life insurance. When the time comes, they can make withdrawals equal to the sum of premiums paid to pay for the college fees without being taxed.
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