Types of Annuities
There are many types that investors can take advantage. Each of them offers different features that help investors to meet their varied investment needs. The two main types are fixed and variable annuities. The fixed type has a fixed rate of return over a set period of time. The variable has a varying rate of return. The value of the rate of return in this case is determined by how well the sub-accounts do. There are many other types that are available. Therefore, one should understand the features of every one of them so as to make an informed decision.
They are contracts between an insurance company and an investor. They are a long term investments and funds should not be withdrawn before the set period of time. If any withdrawals are made before the term is over, some penalties may apply.
With the fixed type of investors are assured a fixed rate of interest for a predetermined period of time by an insurance company. This kind of annuity does not drop in value. This makes it a low-risk investment. The returns are quite low compared to other retirement investments but often much greater than bank cd’s. Some insurance companies offer an up-front bonus or additional bonus interest rate. State insurance departments regulate these and they come in both deferred and immediate payment options.
The two main things that set immediate annuities apart from other forms of is the change in ownership and guaranteed income payout. With this type, unlike others, you turn over ownership of your retirement funds to an insurance company. In exchange, you get a steady stream of payments generally for 10 -30 years or life. Immediate income payments are normally higher that other annuities because you cannot get your money back in a lump sum.
A variable annuity is money that is invested in an investment fund, like a mutual fund, that has specific investment goals. The payout is not fixed as in the fixed type, instead it is based on the performance of the funds after all expenses, fees and costs have been deducted. Variable are a high risk investment, but they offer a great opportunity for growth. The downside to this kind is that there is no guaranteed payout. Due to this, variable must be regulated by the (SEC) Securities & Exchange Commission.
Indexed annuities are a unique type of fixed product that has some features that the variable type offers. They offer a guaranteed interest rate, just like the fixed rate, but also have another additional rate that is determined by the market index. For those who do not know, the market index is a financial tool that is used by investors to track the performance of part of the stock market. Examples of market indexes include the Dow Jones Industrial Average, S&P 500 and the NASDAQ. When there is growth based on the index the investors receive additional interest. This kind of annuity also has immediate and deferred payments.
There are several risks that one should consider when choosing one type over another. People who choose to go the safe route by choosing fixed usually stand the risk of missing out on the chance of greater returns and growth. On the other hand, those who decide to go with the variable type, risk losing their principal and cannot have peace of mind with the assurance of guaranteed return on their investment.
Riders are extra features that can be added. There are different types of riders that can be added to meet different needs of an investor. Investors have the freedom to add several riders on their contract. However, riders carry restrictions. Therefore, one should do some research before adding any onto his or her plan. Some of the common types of riders are: • Death benefit rider • Lifetime income benefit rider
Allows one to earn tax deferred interest that grows without incurring any penalties or fees. This helps one to save for his or her retirement. The different types offer one several options to choose from. This ensures that everyone gets a chance to achieve his or her financial goals in the most comfortable way. It is important for one to plan for his or her retirement years. There are several ways through which one can do that. Investing in an annuity is one of them. Therefore, one should learn about the different types and choose one that he or she feels is the best.