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Annuities Summary

Annuity – Summary or Recap

There are many varieties of annuities but the three most popular kinds are:

1

Fixed Annuities

Fixed annuities are a contract between you and an insurance company that lets you build up capital in a tax-deferred manner. When the contract begins, you pay a lump sum to the insurance company and they agree, in writing, to pay a fixed rate of interest on the investment. At the same time, the company also guarantees the principal amount in full.

Annuitants, which is what investors are called, can opt to get monthly payouts for life or to take payouts for a fixed term of time, like 20 or 30 years. The contract specifies what happens to any remaining funds should the annuitant die before payouts equal principal.

2

Variable Annuities

A variable annuity has many things in common with its cousin, the fixed annuity. Both are usually initiated with lump-sum payments and offer monthly payouts. The bot also offers tax-deferred income options and tax-free accumulation of capital. But the “variable” component of the variable annuity is unique. It means the interest rate is not fixed but tied to a market-based portfolio of mutual funds.

Your invested money is placed into a carefully managed mutual-fund portfolio, ETFs or similar large-scale market instruments. You have the option to adjust your portfolio, within certain limits. Many people who are drawn to variable annuities view them as a hybrid of life insurance and equity investing.

3

Indexed Annuities

These investment vehicles are called “indexed” because they earn their returns based on an accepted major market index, like the S&P 500 or the Dow. There are advantages and disadvantages to having an annuity contract tied to a key market index. Contract owners can receive lower or higher returns based solely on market performance. Most indexed annuities do have built-in minimum and maximum levels that protect investors in bad times and restrict extremely high payouts in good times.

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