Annuities are one of the methods of investing money and getting a return on your investment every year. There are various methods in which annuities can work. Some of these annuities are linked to the equity markets. In these, the returns may be considerably more than the returns generated by the annuities invested otherwise. So an investor may have various questions about annuities and how do annuities work will be the basic question.
Annuities work because the individual who needs to invest in these investment options can do so through the options provided by various insurance companies. The insurance companies provide different options for the investor. One of the options is that the investor can pay a particular amount of money to the insurance company and they will provide a fixed amount of return for the money invested every year. This amount can be for a specified period of time or it can be for the rest of the life of the person who has invested the money.
When the option that has been asked by the investor is for payment for the whole life time, then the amount that is paid to the investor will usually be for a lesser amount. If the option that the investor has asked for is only for a return on the investment for a certain amount of time, then the return will be more.
Another option is that the investor can pay or invest a particular amount in the insurance company and the returns are just once as a huge amount after a particular period of time. The investment made by the investor can be a monthly payment where just like a systematic investment plan, the investor invests a particular amount every month or year. The payment made by the individual can also be made as a single payment.
The money invested by the investor is invested by the insurance company in various investment options. Some are high risk investments and others are low risk investments. Each of the annuities have a particular rate at which the investment grows. There is very less chance for the investment to become a negative return. In fact, the annuities work on a similar principle to fixed deposits or equity linked fund. It has the best features of both the popular type of investments. This is the principle in which the annuities work. The return for the investor depends on the type of annuity schemes chosen by the investor because there are various types available with different insurance companies.