What is an Annuity? A Simple Explanation for Kids, Teens and Beginners

What is an Annuity? Insurance 101: Easy Peasy Finance for Kids and Beginners

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Introduction to Annuity for Kids and Teens

This video explains the concept of annuity in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about annuities, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.

Suitable for students from grade levels:

• Kindergarten
• Elementary School
• Middle School
• High School

The topics covered are:

• What is an annuity
• What are the pros / advantages of annuities
• Are there any cons / disadvantages of annuities
• Should you invest in annuities
• Different types of annuities

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What is an annuity?

An annuity is a contract between you and an insurance company where you get a steady stream of income from the insurance company for a predetermined duration, starting immediately or in the future.

To get this benefit, you make one large payment, or multiple smaller payments over time.

What are the advantages of annuities?

One of the biggest benefits of an annuity is that it gives you guaranteed income that can last a lifetime, no matter how long you live. This makes it very attractive to retirees as it gives them a lot of peace of mind even if they don’t have a pension, or have not saved enough money for retirement.

Annuities are tax deferred, which means you only pay tax on the income from annuity – the contributions you make are pre-tax.

Also, there is no limit to the amount that can be put into annuities, making it a good retirement saving option if other tax deferred options like 401K or IRA are maxed out.

Annuities are also very customizable. You can choose whether to buy an annuity using a large one-time payment, or through many smaller payments.

You can decide whether the annuity starts paying out money immediately, or in the future. You can also choose whether the annuity pays out money for a specific period of time, or for the rest of your life.

Are there any disadvantages of annuities?

Depending on how you customize it, the fees for an annuity could be very high. Also, usually there are restrictions and high penalties for early withdrawals.

Although annuities guarantee income, the payout is much lower than the returns you would get from investing directly in the stock market.

Also, the payouts are taxed as regular income, which usually has a higher rate of tax than long term capital gains.

Should I invest in annuities?

Annuities can be a good option for people who may not be able to manage their long term investments responsibly.

Annuities can also help those who receive an unexpected lump sum – from a lottery, inheritance or a lawsuit – and would like to utilize it to get steady, predictable income.

For most others, it’s better to plan and invest on their own for their retirement.

Are there different types of annuities?

Yes. The main types of annuities are fixed, variable, and indexed, based on the type of payout they provide.

Depending on when you start receiving the payout, annuities can also be classified as immediate or deferred.

But those are topics for another time.

Conclusion

Have you ever considered an annuity, or bought one? Do you know someone who is using an annuity to generate regular income in retirement?

Have you compared annuities to other avenues, like investing directly in the stock market, or investing in Mutual Funds (MFs) or Exchange Traded Funds (ETFs)?

Please let us know through the comments.

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Download Transcript: Ideal for Use by Teachers in their Lesson Plan to Teach Kids & Teens

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Podcast: What is an Annuity