Overview – Annuities are a contract between an investor and a life insurance company. Their primary purpose is income production, but have a few benefits that you will generally not receive from a mutual fund portfolio. These benefits include a death benefit, a guaranteed payment option for life, and tax deferred status while inside of the annuity. Annuities can vary greatly from one product to the next, so it is very important to understand the various riders and details specific to your contract.
Definition – Fixed annuities are essentially CD-like investments issued by insurance companies. Like CDs, they pay guaranteed rates of interest, in many cases higher than bank CDs. Fixed annuities can be deferred or immediate. The deferred variety accumulate regular rates of interest and the immediate kind make fixed payments – determined by your age and size of your annuity – during retirement. The convenience and predictability of a set payout makes a fixed annuity a popular option for retirees who want a known income stream to supplement their other retirement income.
USelfDirect Explanation- The easiest of all annuities to explain, fixed annuities provide a fixed payment that can sometimes include a premium bonus. Investors lend money to an insurance company, similar to how they lend money to a bank with a CD, and the insurance company pays a fixed rate of return over a fixed period of time. Generally considered one of the safest investments out there, a fixed annuity is backed by the credit of the company issuing the contract.
Definition – An equity-indexed annuity is a combination of a fixed and a variable annuity. The marketing pitch usually goes something like this: Equity-indexed annuities give you the best of both worlds. Guaranteed return: As with a fixed annuity, you get the low-risk appeal of a guaranteed minimum return (usually 2% to 3%). With some upside: But, as with a variable annuity, you also have a shot at higher gains if the stock market rises, since an equity indexed annuity’s return is also tied to the performance of a benchmark index, such as the Standard & Poor’s 500.
SiS Explanation- Working as a cross between a fixed annuity and a variable annuity, an indexed annuity allows an investor to take advantage of market gains while not risking principal. Most indexed annuities offer guaranteed principal protection, not allowing the investor to lose money should the market drop. In exchange for this guarantee, most indexed annuities are structured to where the investor will be capped at a certain percentage and gains along the way to the cap will generally be shared with the insurance company. Indexed annuities will generally return higher than fixed annuities, though not much higher.
Definition – A variable annuity is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose. Compare that to a fixed annuity, which provides a guaranteed payout.
SiS Explanation- One of the more complicated investment vehicles due to the various options (riders) that can come along with them, variable annuities offer an investor full exposure to a range of mutual fund like investments called sub accounts that rise and fall with the stock market. Variable annuities come with all of the bells and whistles that other annuities come with, but can also be very expensive. This increased market exposure can allow the annuity a better opportunity to have a higher income production than a fixed annuity, but also carries market risks that aren’t present with its fixed or indexed counterparts.