Three Types of Annuities
Annuities are a popular savings tool for those who want to create streams of income at a later date. It is also a good investment tool. There are generally three types of annuities—fixed, equity indexed, and variable, that depends on the rates, needs, and goals of the insured.
Fixed Indexed Annuities
In a fixed annuity, the insurance company agrees to pay no less than specified rates of interest during the time the account is growing. Fixed annuity rates can be deferred or immediate. Deferred fixed index annuities accumulate regular rates of interest, while the immediate fixed annuities make fixed payments—determined by age and size of annuity—during retirement. The convenience and predictability of payout rates make a fixed annuity a popular option for retirees who want a known income stream to supplement their other retirement income.
Equity Indexed Annuities
An equity indexed annuity, also called fixed index annuity, provides a guarantee of prinicipal—the best features of a traditional fixed annuity. Unlike most securities or mutual funds which are susceptible to market fluctuation, premium deposited into an equity indexed annuity is guaranteed to never go down due to market downturns. Equity indexed annuity credits interest using a formula based on index changes as compared to most fixed annuities that only credit interest calculated at rates set in the contract. Equity indexed annuities can provide you with a guaranteed income stream with the purchase of an equity indexed annuity. In equity indexed, you can choose from several different annuity payment rates options.
A variable annuity offers different rates of mutual fund investment options—from stocks, bonds, money market instruments, or some combination of the three. However, unlike mutual funds, variable annuities let you or your beneficiaries receive periodic payments. Variable annuities also offer death benefits that will pay to your beneficiary either your account value or the greater of your account value and a minimum amount, such as your total purchase payments. Variable annuities are also tax-deferred, meaning you won’t pay any taxes on income and investment gains from the annuity until you withdraw.