admin December 11, 2015 No Comments

In its simplest definition, an annuity is an amount payable annually. There are, however, many types of annuities, giving you the ability to choose an annuity that is tailored to your specific financial situation and/or retirement goals. While we strongly suggest you discuss your options with a financial professional, here is a basic overview of the options you have:

 

Fixed Annuities

A fixed annuity pays a guaranteed “fixed” interest rate (based on the current market rates of interest) where the earnings compound and grow tax-deferred. Fixed annuities offer safety of your principal from typical day-to-day market fluctuations in the stock, bond or other investment markets. As such, fixed annuities are often chosen fro their predictability, stability and guaranteed stream of income. Basically with a fixed annuity, the insurance company agrees to pay a fixed rate of income to the investor for life after a certain date.

 

Variable Annuities

A variable annuity allows the flexibility to invest your funds in a wide range of investment options through “sub-accounts.” Sub-accounts are somewhat similar in design to mutual funds, and allow for investing in stocks, bonds, money markets – even guaranteed fixed rate instruments. The ability to choose, and change, investment options provides you the advantage of participating fully in any market gains (not fractionally), thus potentially providing even higher returns than equity-indexed annuities. However, unlike equity-indexed annuities, many (though not all) variable annuities offer no guaranteed rate of return. Therefore, the value of the variable annuity and its sub-accounts will fluctuate day-to-day, based on the performance of the underlying investments you choose.

Such an annuity may be better suited for those investors with a longer term time horizon, who can afford these day-to-day market gyrations. As with a fixed annuity, any gains in the variable annuity credited to the account are tax-deferred until the funds are withdrawn. Unlike a fixed annuity, your funds are not guaranteed by the insurer against market fluctuations, including risk of principal. A key benefit of variable annuities is the ability to transfer assets among the various investment options, as necessary, in response to market conditions or your changing investment goals without incurring current taxes on any capital gains and/or income.

 

Indexed Annuities

An equity-indexed annuity differs from a fixed annuity in that the rate of return on your investment is based upon the better of either a) the growth of a named stock market index, such as the Dow Jones Industrial Average, or b) a minimum guaranteed interest rate. Many equity-indexed annuities offer you a portion (not a full 100%) of the index gains. Still, this type of annuity does allow for potentially higher returns than a typical fixed annuity, since you can participate in a rising stock market, yet be protected on the downside by the minimum guaranteed rate of return.

 

Hybrid Annuity

A hybrid annuity is an insurance contract that allows you to allocate funds to both fixed and variable annuity components. Most hybrid annuities allow the investor to choose the amount of assets to allocate to the more conservative, fixed return investments, which offer a lower but guaranteed rate of return, and what amount to allocate toward more volatile variable annuity investments, which offer the potential for higher returns. Hybrid annuities can be useful if you have a longer time horizon and wish to participate in the stock and bond markets.

 

Deferred Annuities

A type of annuity contract that delays payments of income, installments or a lump sum until the investor chooses to receive them. This type of annuity has two primary phases: the savings phase in which you invest money into the account; and the income phase in which the plan is converted into an annuity and payments are received. A deferred annuity can be either fixed or variable.

 

Immediate Annuities

A type of annuity contract that is purchased with a single lump sum payment an in exchange, pays a guaranteed income that starts almost immediately. Immediate annuities are most commonly purchased by retirees with funds they have accumulated for retirement and who are concerned about outliving their savings and who want a predictable stream of payments that will continue the rest of their lives. However, one disadvantage is that an immediate annuity is irreversible once it has been purchased. This could pose a problem if the retiree needed a large sum of money to deal with an emergency.

 

What should your Next Steps be?

First, we suggest you use our FREE service to receive an annuity rate quote. This will show you the type of returns you can expect from various types of annuities and annuity providers. Simply use the form at the top of the page (enter your zip code) and we’ll walk you through the easy steps to get your annuity quotes. Once you have your quotes, we suggest you discuss your options with a financial advisor or insurance agent. Annuities.com does not sell annuities nor are we affiliated with any company that does so.