Annuities aren't one-size-fits-all. That's why it's important to learn how they work.
What is Annuity?
An annuity is a financial product typically used by investors to save tax-deferred for retirement or to generate regular income payments, helping to replace a paycheck in retirement. Annuities are insurance contracts whose payments are guaranteed by the company issuing the contract. At its most basic level, an annuity has been designed to increase your financial security as you begin your golden years. You pay a premium to a financial institution, and in time you are repaid in either a series of payments or one lump sum.
The Benefit of Annuity
Annuities are tax-advantaged, meaning taxes can be deferred as they grow. When it comes to variable annuities, you can also receive a death benefit in case you pass away before receiving payments. For fixed index annuities, your money is tied directly to a financial index and has flexible interest rates. Furthermore, compared to other kinds of investments, these may better protect your money from major stock market risks.
What is Fixed Index Annuity?
Fixed index annuities give you the opportunity to earn returns based on the performance of a benchmark stock index (e.g., S&P 500) without the risk of ever losing money in a year when the stock market declines. A fixed index annuity is governed by a rate floor and a rate cap making them a safer alternative to a variable annuity.
The index annuity rate floor ensures that no matter how poorly a stock index performs in a given year, you will not see a negative return. The rate cap allows insurance companies to offer this type of guarantee. The annual return on your annuity is capped, usually between 3 and 7 percent a year. The caps can be adjusted by the issuing insurance company each year.
Currently, a number of index annuity companies in our list (see above) offer you a premium bonus of up to 10 percent, when you sign up. This bonus immediately increases your initial account value. Index annuities charge surrender fees if you withdrawal the money early.
Why Should I Consider Purchasing an Annuity?
In essence, an annuity can provide a "retirement paycheck" that guarantees a payout of income for a set number of years or even the rest of your lifetime depending on the option you choose. When you purchase an annuity, you can pay with a lump sum or create a payment plan to provide a stream of income. Annuities are flexible. For example, some annuities begin paying a lifetime income stream immediately while others provide that stream in the future. And with the purchase of an add-on benefit† (available for an additional charge), an annuity is the only product that can provide a steady stream of lifetime income that's unaffected by interest rate fluctuations and market downturns. And, your payments even have the potential to keep growing.
Sound too good to be true? It's not. It's important to remember that annuities were created by insurance companies, which have the unique ability to offer features and add-on options that help protect investors against outliving savings or having to change their lifestyle in retirement.
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