Annuities are unique financial products that, along with Social Security, employer pensions, your 401(k) plan, IRA and other assets, can enhance your retirement security.
Annuities allow you to accumulate tax-deferred funds for retirement and then, if you desire, receive a guaranteed income (Annuitization) payable for life or for a specified period of time.
Annuities are issued by insurance companies and distributed through licensed insurance professionals. Insurance companies offer different types, rates, and returns on annuity investments.
Immediate or Deferred
An annuity may be either immediate or deferred. If you want to begin receiving income immediately, consider an immediate annuity. Immediate annuities, usually purchased with a single premium, provide income payments that start no later than one year after you pay the premium.
The reason for buying an immediate annuity is to obtain immediate income for the purpose of retirement.
If you are years away from retirement, consider a deferred annuity. Deferred annuities provide income payments that often start many years later. Deferred annuities have an accumulation period, which is the time between when you start paying premiums and when income payments start.
The main reason for buying a deferred annuity is to accumulate money on a tax-deferred basis, which can then provide an income at a later date.
Fixed or Variable
There are two basic types of annuity contracts—fixed and variable. At the time you buy an annuity contract you will select between a fixed or variable. This determines how earnings are credited in your contract.
A fixed annuity provides fixed-dollar income payments backed by the guarantees in the contract. During the accumulation period of a fixed deferred annuity, your money (less any applicable charges) earns interest rates set by the insurance company spelled out in the annuity contract.
Every fixed annuity has a current interest rate and a minimum guaranteed interest rate. The company guarantees that it will pay no less than a minimum rate of interest. During the payout period, the amount of each income payment to you is generally set when the payments start and will not change.
An equity-indexed annuity is a type of fixed annuity, which pays base return. This kind of annuity returns may be higher upon the performance of an equity market index, such as the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500), the Dow Jones Industrial Average (DJIA), or the National Association of Securities Dealers Automated Quotations (NASDAQ).
The annuity’s principal investment is protected from losses in the equity market, while gains add to the annuity’s returns. These types of annuity interest that is credited and when it gets credited to your annuity will vary depending on the particular contract.
A variable annuity offers a range of investment or funding options. During the accumulation period of a variable annuity, the insurance company puts your premiums, less any applicable charges, into a separate account.
You decide how the company will invest those premiums, depending on how much risk you want to take. You may put your premium into a stock, bond, or other account, with no guarantees, or into a fixed account, with a minimum guaranteed interest rate.
During the payout period of a variable annuity, the amount of each income payment to you may be fixed (set at the beginning) or variable (changing with the value of the investments in the separate account).
How Premiums Are Paid
Single premium contracts require you to fully fund the annuity contract in one single premium payment. You cannot add additional money to the account.
Multiple premium contracts allow an annuity to be funded by means of premium payments over a period of time.
There are two kinds of multiple premium contracts—flexible and scheduled. A flexible premium contract lets you pay as much as you want, whenever you want, within set limits. A scheduled premium contract spells out the amount and frequency of your premium payments.
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