From the beginning....
An annuity is a financial product designed to help you grow and protect your money and, when needed, turn that money into a reliable income stream—often during retirement. Annuities are contracts issued by insurance companies. In exchange for your premium (money you put in), the insurer provides certain guarantees such as interest growth, income for life, or protection from market losses.
Annuities Generally Fall into Three Main Categories
Fixed Annuities
Fixed Index Annuities
Variable Annuities
A Fixed Annuity is the most straightforward type. Your money earns a guaranteed interest rate set by the insurance company for a specified period of time. The first Fixed Annuity was issued in 1959.
How It Works:
- You deposit money (either a lump sum or over time).
- The insurance company pays you a guaranteed fixed rate of return.
- The rate that you receive is locked in for a period of time. Typically that can range anywhere from 2 years to 10 years long.
- Your principal is protected from market fluctuations.
Key Features:
- Predictable, guaranteed growth
- Principal protection
- Simple and easy to understand
- Money grows tax deferred
Who It’s For:
Fixed annuities may be appropriate for conservative investors who want safety and stability, similar to a certificate of deposit (CD), but often with better long-term rates and tax-deferred growth.
Variable Annuities
Fixed Index Annuities
Variable Annuities
A Variable Annuity allows you to invest in market-based subaccounts, similar to mutual funds. Your money can grow based on market performance—but it also carries market risk. The first Variable Annuities were introduced in 1952.
How It Works:
- Your premium is allocated to investment options such as stock or bond funds.
- Account value rises and falls based on investment performance.
- Offers potential for higher growth but no guarantee against losses.
Key Features:
- Market growth potential
- Variety of investment options
- Higher risk and typically high fees
Who It’s For:
Variable annuities may appeal to investors seeking growth potential and willing to accept market risk in exchange for the possibility of higher returns.
Fixed Index Annuities
Fixed Index Annuities
Fixed Index Annuities
A Fixed Index Annuity combines elements of both fixed and variable annuities. It offers the potential for interest based growth on the performance of a market index—without directly investing in the market. The first Fixed Index Annuity was introduced in 1995.
How It Works:
- Your money is not invested in the stock market directly.
- Interest credits are linked to an index such as the S&P 500 Index and NASDAQ
- If the index performs well, you earn interest and your money grows
- If the index does not perform well, you DO NOT lose money. Your account value does not go down due to market fluctuation.
Key Features:
- Growth potential linked to a market index
- Protection from market downturns
- You can not lose money while investing in an Index Annuity
Who It’s For:
Fixed index annuities may be suitable for people who want:
- Some market-linked growth potential
- Protection from market downturns