Types of Annuities
Fixed Rate Annuities pay a fixed rate for the life of the annuity or can reset, however most fixed rate annuities pay a set rate for the term of the annuity. Fixed Rate Annuities are guaranteed to not lose principal. There are no management fees, prior earnings are guaranteed as well (meaning progress is never lost) and there is a minimum interest guarantee. These are largely dependent upon the interest rates of economic times.
Fixed Index Annuities pay an interest credited to your account based upon some measure of index. There are many options that exist including interest credited from the S&P 500 which include caps or rates of participation of those indexes. The different types of interest crediting vary by insurance company. There are many insurance companies who issue Fixed Index Annuities. Fixed Index Annuities are guaranteed to not lose principal. There are no management fees, prior earnings are guaranteed as well (meaning progress is never lost) and there can be a minimum interest guarantee. The participation rates and caps can be largely dependent upon economic times.
Variable Annuities are a different type of annuity. They are registered as securities because their principals are NOT guaranteed. There are management fees which can add up to 2-3% of your contract value. Your progress in your annuity is NOT guaranteed. Often there are sub accounts of funds (with fees) that act as the underlying investment vehicles within the variable annuity contract.
There is another type of annuity that should be mentioned as well. A Single Premium Immediate Annuity (SPIA). When you purchase a SPIA the insurance company is providing you a guaranteed income for life or a period certain. This is a pure income stream from a lump sum of money. It is often used at the beginning of a retirement period or other life event.
The purpose of investing within an annuity is future income. Annuities are most appropriate for a future income stream in retirement that can provide a person or couple with peace of mind that they have a monthly income to rely on.
Annuities can be a part of a sound retirement income strategy. In times of higher interest rates, people might find fixed rate annuities as an important piece of their future income puzzle. Likewise a person might find that owning a Fixed Index Annuity provides the opportunity for no annual management fees, guaranteed principal and still being able to participate in index gains by the use of interest crediting whereby there is some participation rate on the upside but no participation on the downside. People should also consider that Fixed Annuities, Fixed Index Annuities and Variable Annuities come built with surrender charges for early surrender of accounts. The surrender charges often begin higher (and often allow for a certain percentage of the account to be able to be withdrawn without penalty) and begin to decline with each year of ownership. At some point the surrender charges disappear. Surrender charges can be as high as ten years. Annuities are long term investments.
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