An annuity is designed to meet retirement or other long-term goals. It can work for you whether you are currently saving for retirement or already in retirement by guaranteeing a portion of your assets.
You can explore the different types of annuities below or call us at 888-547-6541 to consult with one of our experts.
Historically, fixed annuities were the only type of annuities that companies issued. A fixed annuity pays a fixed, set rate of interest, which could change periodically, on the money invested in the annuity. In many cases, the annuity issuer will pay a guaranteed minimum rate of interest on the annuity account but also hold out the possibility that it will pay a higher rate of interest if market conditions permit (i.e., interest rates have risen on other money market instruments). To induce people to purchase fixed annuities, many issuers also will pay a much higher rate of interest for an initial period of time--usually a year. This higher rate of interest is sometimes called a bonus interest rate. Thus, the issuer may agree to pay 6 percent for the first year and then pay no less than 3 percent annually on the annuity after the first year. Usually, the annuity issuer will pay more than the minimum guaranteed rate on the fixed annuity. Fixed annuities are conservative investments for individuals who prefer fixed rates of return on their investments.
An indexed (or equity-indexed) type of annuity is sort of a hybrid between a fixed annuity and a variable annuity. When you purchase an indexed annuity, the issuer agrees to pay a return on your account that is tied to a stock market index--usually the S& P 500. However, the issuer also guarantees to pay you no less than a certain return in a given period if the return on that stock market index falls below that minimum percentage. Thus, if stocks do well, you earn above-average returns on your annuity, and if stocks fall in value, you will not lose money (as you would with many variable annuities).
One of the tradeoffs to an indexed annuity is that the issuer will typically not pay you the full return on the equity index. Many indexed annuities have caps (e.g., the most the issuer will pay you is 12 percent per year even if the equity index does much better than that). Furthermore, many issuers will pay you only a certain percentage of any given return in the equity index--called the participation rate. Assuming a 75 percent participation rate, if the equity index goes up 10 percent in a year, then the issuer may only credit your account with 7.5 percent for that period. Thus, with an equity-indexed annuity, you give up some of the upside potential for some protection on the downside.
Instead of receiving interest on the money invested in your annuity, you may choose a variable annuity that allows you to invest your annuity money in one or more investment subaccounts. The subaccounts (often called variable subaccounts, flexible accounts, or flexible subaccounts) will then invest in stocks, bonds, money market instruments, and other types of investments.. The annuity issuer will allow you to allocate your money among the different accounts in any way that you desire. Furthermore, most annuity issuers allow you to move money from one subaccount to another without incurring costs (and there are usually no tax consequences). With a variable annuity, the amount of earnings that will be credited to your annuity account will depend on the performance of the underlying subaccounts. Unlike a fixed annuity, you assume the investment risk on the annuity. Some years, you may do very well, while in others, you may lose money. In recent years, variable annuities have become very popular, as people have been more willing to take the added risk to try to pursue higher returns than what is available on fixed annuities.
Caution: Variable annuities are sold by prospectus. You should consider the investment objectives, risk, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity, can be obtained from from your financial advisor. You should read the prospectus carefully before you invest.