Annuities

A fixed annuity is a popular retirement and savings vehicle that was created for long term investors who want the stability of a guaranteed fixed interest rate with no risk that they will ever lose any of their principal. A fixed annuity contract lets the insurance company invest your lump sum or accumulated contributions into low-risk assets, providing a guaranteed return traditionally higher than that of a CD product.
While a fixed annuity provides steady, guaranteed, and worry free growth, the real advantage is the tax-deferred benefits that a fixed annuity funded with qualified (pre-tax) money presents. A tax-deferred fixed annuity lets you defer all tax on earnings and principal into the future, providing exceptional growth due to the compounding process on earnings. While the interest on a certificate of deposit is taxed yearly (reducing your total accumulated value), the fixed annuity is designed to encourage real retirement savings by providing a long term tax deference incentive for you to grow your investment.

A fixed annuity is typically structured and planned out in two phases. The first phase includes the accumulation phase where long term growth and compounding happens on a tax deferred basis. The second phase is typically the payout phase, whereby a fixed annuity can be converted into a monthly fixed income and paid on a guaranteed basis over a lifetime or set number of payments. Alternatively, a fixed annuity can be rolled over into a new annuity with prevailing interest rates through a 1035 exchange, with no tax liabilities incurred if processed correctly.

The equity indexed annuity is a unique type of fixed annuity that allows an individual to participate in upsides of the stock market, without ever risking the loss of their principal due to unexpected market changes. An equity indexed annuity also guarantees a minimum interest rate regardless of future performance, with each insurance company using a different formula to calculate the rate guarantees they offer to investors.

The equity indexed annuity was created approximately ten years ago by insurance companies to meet the interests of active seniors who wanted more from their fixed interest products. While the stock market offers opportunities for higher returns, that upside always comes with potential risk. For conservative investments, fixed interest products prioritize safety and protection of principal, but that comes with the promise of lower returns. The equity indexed annuity was designed to provide a middle ground where performance meets safety and investors can experience the best of both worlds.

The equity indexed annuity can track a preferred stock market index, such as the S&P 500, NASDAQ, or Dow, with the rate of return usually being a set percentage of the increase the index shows over a set period, or a guaranteed minimum interest rate (whichever is higher). That makes the equity indexed annuity a very attractive annuity for many investors because the principal investment is protected and guaranteed from loss, while gains are locked in periodically to add to the total return.

Equity indexed annuity companies calculate their rate guarantees by formulating different components relating to the products they offer. This can include the minimum amount you are guaranteed to earn, the maximum amount you can earn, the total percentage of upward movement you can participate in, and what you can do with your accumulated funds once the annuity term is over. For any equity indexed annuity, it is important to clearly understand how the annuity works, to ensure your selection is best suited to meet your future retirement needs.

An immediate annuity lets you convert all or part of your retirement savings to a guaranteed stream of income that you can count on for the rest of your life. This type of annuity gives you the security of knowing you will continue to receive money each and every month - even if you live to be 100 or older.

You can buy an immediate annuity with funds available from a 401k, IRA, savings account, life insurance policy, inheritance, or even the sale of a home or major asset. An insurance company that you select provides the immediate annuity to you for a set upfront cost, and agrees to make regular scheduled payments to you either by check or automatic deposit to your bank.

You can choose how often you receive a payment from the annuity, such as every month, quarter or yearly. The amount of income you receive is based on the amount of money you initially contribute, plus a number of factors including your age, sex, income option selected, and interest rates at the time of purchase.

With billions of investment dollars going into mutual funds, insurance companies created a competing product called Variable Annuities that allows you to invest your money within investment portfolios called subaccounts. Unlike other annuities, a variable annuity does not guarantee a set rate of interest or earnings, being based instead off fund performance and account averages. However you can buy, sell and switch funds at any time without incurring taxes until you begin to withdraw your original investment and income after age 59 1/2. At that time your gains are taxed as ordinary income.

Variable annuities are sometimes used by investors who like to trade (buy and sell) mutual funds often, who do not need their money for many years to come, and are in a very high tax bracket now but plan to be in a much lower tax bracket at retirement.