Investing In Annuities
An annuity is an investment vehicle sold primarily by insurance companies. Every annuity has two basic properties:
Whether the payout is immediate or deferred, and whether the investment type is fixed or variable. An annuity with Immediate payout begins payments to you immediately, whereas the deferred payout means you will receive payments at a later date. Fixed annuities offer a rate of return guaranteed by the insurance company whereas variable annuities are linked to the performance of other investments-usually a combination of stocks, bonds, and/or money market securities.
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The return on a variable annuity investment is incumbent upon the performance of these other underlying investments.
Types of Annuity Investments
Deferred Annuity Investments
A fixed deferred annuity, also referred to as a tax-deferred annuity, is a contract between you and an insurance company for a guaranteed interest bearing policy with guaranteed income options. The insurance company credits interest, and you don't pay taxes on the earnings until you make a withdrawal or begin receiving an annuity income. Like all deferred annuities, fixed deferred annuities help you accumulate money for retirement through the power of tax-deferred compound interest. Your annuity contract earns a safe, competitive return on a continually increasing balance. It's important to note that surrender fees may be incurred if you opt out of your investment early. These fees are based on percentages of your premium which are set by the insurance companies.
Immediate Annuity Investments
Most often immediate annuities are purchased by retired individuals or those who require additional income to supplement part-time employment. Immediate annuities were developed to provide guaranteed and convenient periodic income payments. Your investment in an immediate annuity is funded with a single payment and income payments begin shortly after the contract is purchased. This lump-sum payment guarantees periodic income payments over a pre-determined period of time or for the rest of your life.
Immediate annuity owners may choose one of the following payout options:
- Period Certain: guaranteed income over a period ranging from five to 30 years.
- Life Only or Single Life: guaranteed income for the life of the annuitant.
- Single Life with Period Certain: guaranteed income for the life of the annuitant with payments guaranteed for no less than a period ranging from 5 to 30 years. For example, if you chose a Single Life with 5 years guaranteed, you (or a beneficiary) would be guaranteed payments for at least 5 years or as long as you are living thereafter.
- Joint and Survivor: guaranteed income covering two or more lives (usually the investor and spouse) and continues as long as any either of the annuitants is living.
Equity-indexed Annuity Investments
This type of investment is attractive to consumers since it offers a market-driven investment with potentially attractive returns, plus a guaranteed minimum return. The money you put down isn't directly invested in the stock market. Instead, you are offered a percentage of how much the index gains over a period of time, along with a guaranteed minimum return if the market declines. Most insurance companies offer you a guaranteed minimum return of at least 3 percent of your premium. Equity-indexed annuities guarantee you a minimum interest rate (often about 3 percent) on your investment while offering the potential of higher rates by tying your return to an index like the Standard and Poor's 500. At predetermined times during the life of the annuity you are credited with a percentage of the gain of the index. The schedule varies with each annuity. Some offer annual "indexing," while others use various averages taken over the life of the investment.
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Variable Annuity Investments
A variable annuity invests in stocks or bonds, has no predetermined rate of return, and offers a possibly higher rate of return when compared to a fixed annuity. The nature of variable annuities makes them flexible long-term retirement investments. However, the main disadvantage with variable annuities is that their value is subject to the fluctuation of market conditions-meaning you may be more at risk to lose rather than gain money. Your principal is not guaranteed by the issuing insurance company as it is with fixed annuities.