If you are considering a fixed annuity as a retirement income option, you will need to learn the different types of fixed annuities on the market today. The three main types are immediate, deferred, and CD-type fixed annuities.
Immediate Fixed Annuities
An immediate fixed annuity is, as the name implies, an annuity that pays out immediately. This is the best known type of annuity; once you make the initial premium payment, you will see the monthly payments arrive shortly thereafter.
Deferred Fixed Annuities
With a deferred fixed annuity, the interest is reinvested rather than being paid out right away. No payments are made until a later date, usually at the end of the term. The money is tax-deferred, allowing you to earn interest instead on money you would have paid taxes on.
Just as any other annuity, an indexed annuity provides a monthly income based on a one-time premium deposit at an agreed upon rate. The difference is that the interest credited on an indexed annuity is calculated based on the index to which the annuity is linked.
There is a minimum guaranteed return on the investment that protects you from some of the risk involved; however, there is more risk and often a lower return with this type of annuity due to the caps on returns and fees that are involved.
To choose the right annuity, take the time to discuss all of your retirement income needs with one of our Insurance Advisors. Complete the request form for a free consultation.
A variable annuity is a product issued by an insurance company under the same basic rules of law which govern fixed annuity contracts. A variable annuity is a security and generally is registered with the Securities and Exchange Commission. Earnings or interest on money contributed is tax-deferred, as is that on a fixed annuity contract. Mortality charges and other expenses are charged against the values under the variable annuity contract. Taxes are due upon withdrawal and a 10% penalty tax will apply to withdrawals before age 59½, unless the withdrawal falls within certain exceptions.
In variable annuity contracts, payments can be allocated to a variety of investment divisions of the Separate Account which invest in such things as the stock and bond markets or mutual funds. The return, if any, on these investment divisions is tied to the performance of the underlying investment portfolios.
Many variable annuities offer a fixed interest option in which the buyer can earn an interest rate guaranteed by the issuer of the contract, with little risk of loss of principal. With a money-market account, the contract holder may earn somewhat higher rates which vary with market conditions and are not guaranteed. The investment objective of the various investment divisions of the Separate Account are described in the prospectus for the variable annuity. Through the use of funding options, a contract holder is able to obtain the advantages of investing in the stock and bond markets in the tax-deferred environment of an annuity contract.
The risks inherent in securities investing make ethical conduct vital. In addition to state insurance licenses, insurance professionals who sell most registered variable products must obtain FINRA (Financial Industry Regulatory Authority) licenses. Individuals selling products for which a FINRA license is required work under the supervision of a broker-dealer.