How Does An Annuity Work?

There are various types of annuities available, each offering different levels of risk and return. The three main types are fixed annuities, variable annuities, and indexed annuities.

Fixed annuities offer a stable, predetermined interest rate, guaranteeing a predictable income stream. This contrasts with variable annuities, which allow you to invest in sub-accounts with a fluctuating rate of return based on market performance, potentially offering growth that aligns with or surpasses inflation. By choosing a fixed annuity, you can ensure a more consistent financial outcome.

Indexed annuities, on the other hand, combine features of both fixed and variable annuities, providing a base guaranteed interest rate along with a rate linked to a stock market index.

Fixed Annuities

Fixed annuities provide:

A stable and predictable return

A fixed interest rate over a specified period

A guaranteed return regardless of market conditions

The insurance company assumes the investment risk by investing in high-quality fixed-rate investments.

Fixed annuities offer customization options such as the addition of a spouse to the contract or the inclusion of specific riders like ‘period certain’ or ‘return of principal’. This adaptability enables you to modify your annuity according to your unique requirements and financial aspirations.

Variable Annuities

Variable annuities, on the other hand, are a bit more complex. They are investment vehicles for retirement that can fluctuate in value and involve investment risk, including the potential loss of principal. With a variable annuity, the amount you receive in payments depends on the gains or losses of the investment portfolio in which your funds are invested.

Hence, even though there’s potential for higher returns, you also risk lower earnings or even financial loss if the investments underperform. Therefore, variable annuities are typically advised for investors willing to accept higher risk for the possibility of increased returns.

Indexed Annuities

Indexed annuities offer a unique blend of features from both fixed and variable annuities. They provide a base guaranteed interest rate, ensuring a minimum return regardless of market conditions.

Beyond the base rate, indexed annuities provide the opportunity for additional interest tied directly to the performance of a specific stock market index. This allows you to potentially earn higher returns during favorable market conditions, without subjecting your principal investment to the complete market risk of underlying investment options.