Annuities are a type of contracts in the form of retirement savings that are sold by the life insurance companies. The advantage of annuities is they offer tax-deferred growth on your savings outside the qualified retirement plans like 401(k) accounts and individual retirement arrangements. An individual who is saving for his or her retirement can invest any amount in an annuity and let that money grow until it is time for the plan to provide retirement benefits. The three fundamental types of annuities are fixed annuity, fixed index or equity index annuity and variable annuity. Both the fixed and fixed index annuities promise a guaranteed minimum value of the annuity contract.
Features of Fixed Annuity
Fixed annuities are similar to a deposit amount in the form of a bank certificate. When you purchase a fixed annuity, the insurance company guarantees a certain interest rate for a fixed period, usually five years or longer. Once this time is over, the insurance company continues to pay interest based on the company’s earning on its investments. Usually, in case of a fixed annuity you will notice a declining surrender charge schedule for 5 to7 years from the date of purchase. A surrender charge is actually a percentage of the annuity value retained by the insurance company if the annuity is stopped during the period of surrender charge. In case of a fixed annuity a wide range of surrender charge and rate combinations are available.
Features of Indexed Annuity
The chief feature of an indexed annuity is how the earnings of these annuities are determined. The earnings of an indexed annuity are always based on the change in value of a stock market. For example, if an equity-indexed annuity earns 80 % of the gain in value of the S&P, which is around 500 stock index in 12 months. If the stock index falls, an index annuity usually pays a guaranteed minimum rate of 0 to 2 %. Since, the maximum earnings is checked, an index annuity can earn only up to a certain limit even if the stock market had a great year. The surrender charge period in case of an indexed annuity is usually 12 to 15 years longer or even more than that of fixed annuity.
A good form of investment
Since, annuity is a form of insurance product, when you buy it automatically reduces the risk factor. But variable annuities include a part of stock and bond portfolios inside the insurance contract available as a choice of investment. The rest of the two annuities i.e. the fixed annuities and the fixed index annuities are purely insurance products and have nothing to do with investment component. So, keeping this into consideration we can deduce that annuity protects your investment against any kind of long-term risk. Hence, ultimately it can be concluded that an annuity can prove to be a perfect form of investment if you are clear about your retirement goals. But before investing there are several things that you should understand clearly like what are the available investment options, how the income on annuity is taxed, how it complements the other investments of yours and when can you expect to start earning.