An annuity is essentially a contract between an insurance company and an individual that assures the latter of income throughout their life. This is in exchange of giving the company a given amount in payment whether lump sum or in a series of payments. There are both types of variable and indexed annuities, and one has to view both before deciding on the option best suited for one’s lifestyle. This review looks at both.
With fixed annuities, the insurer gives a specified credit return rate to the annuity owner. This rate, declared by the insurer, is based on the investment performance of the assets of the general account. An indexed annuity is a fixed annuity that gives the owner of the contract an investment return dependent on the level change of a specified index. The owner gets nothing less than a fixed return on the made investment that is stated in the contract.
On the other hand, for a variable annuity the investor’s principal gets invested in one or more investment options referred to as sub accounts consisting from bonds, stocks to the money market. They provide a slight different and more complex trade-off to the owner in comparison to the indexed annuity in that they are dependent n the performance of the constituent securities portfolio.
Guaranteed Return to the Investor
Indexed annuities are popular due to the guarantee in minimum interest they give. In addition, this applies to the duration of the life of the owner to even after their death. The variable annuity contrastingly lacks guaranteed returns. This is unless the insurance company offers the investor riders. However, these riders have to be purchased and the investor has to remove money in a specified manner or alternatively leave it in the contract for some stated number of years.
Invest in Assurance
Indexed annuities have the support of top-rated insurance companies that are regulated by the state. They give the investor growth that is tax-deferred. Due to the guarantee return they have, they attract better interest rates when compared to bonds and money markets typical with variable annuities. Furthermore, the investment participates in gaining from the stock market without risk of loss.
Pass on your Earnings
The indexed annuities allow the investors to bypass probate and pass on earnings from the annuities to their heirs. Simply put, one cannot outlive the income. However, they come with a life insurance option of a payout guarantee upon death. The withdrawal privileges of the indexed annuity are flexible thus they give liquidity.
Variable annuities usually have surrender fee paid to the insurance company. In addition they are funds of the contract are untouchable until they reach 59.5, or one pays 10% in penalty for early withdrawal. The return from an investment through a variable annuity fluctuates with performance in the market. Just as one may accumulate a lot during favorable phases, one may incur losses or lack of return during unfavorable times. As such, there is a consistent performance risk associated with variable annuities.
Prior to investing, one should consider the amount of risk being taken. In addition, one should ensure that the money for investment is liquid and easy to access. Finally, one should pay close attention to the rate of return the annuity offers.