Annuities, The Big Three: Fixed Interest, Fixed Indexed, and Variable

By |2015-05-22T22:20:36+00:00July 30th, 2013|Annuities, Annuities 101|

Fixed Interest Annuities

Have you ever bought a savings certificate from a bank?  A fixed interest annuity is similar, except it is bought from an insurance company. A bank guarantees the deposit and interest on a bank CD, with a fixed interest annuity, the insurance company guarantees the product.  There is one basic different between a bank CD and a fixed interest annuity, the tax liability on interest earned in a fixed interest annuity is deferred until the funds are touched or used. Interest rates can vary between states of residence and offerings from insurance companies.  Time periods can vary from 2 years to as many as 10 for fixed interest annuities. Interest rates in fixed interest annuities are based on the US Treasury 10 year posted rate, so over time; interest rates in fixed interest annuities tend to be slightly higher than equivalent bank products. It is always best to compare rates and make sure you are rece3iving the highest possible yield whether it is a bank or an insurance company.

Fixed Indexed Annuities

Fixed Indexed Annuities are fully guaranteed against any loss of principal by the issuing insurance company, what is not guaranteed is the earned yield on your funds.  The only thing at risk is the yield and the reason is simple, the actual yield responsibility is passed to a third party (S&P 500 stock index as an example) and your yield depends on how the outside source performed over a period of time.  The period of time can be monthly, 1 year or 2 years in most situations. A Fixed Indexed Annuity is like investing in a stock market index but without any exposure to risk, your funds are always free from risk.  Annually when the credited interest (or yield) on you funds is calculated, the total value of your account (principal and interest) is now fully guaranteed and free from risk.   Your gains will go up and down with the index, however if the index fails to gain over your period of time, you will never participate in any down side.

Here is a video that explains how a Fixed Indexed Annuity works, just click on the link.

https://www.youtube.com/watch?v=ChHaRxguEkM

Variable Annuities

A variable annuity is a security sold by licensed security salespeople.  A variable annuity is similar to investing in mutual funds, these funds are known as sub accounts.  Variable annuities charge fees, fees for the contract, fees for the management of your money in the sub accounts and fees for any additional riders placed on your variable annuity.  Numerous investment options generally exist in variable annuities such as stocks and bonds. Normally your funds are diversified between many different investment choices in the sub accounts. The performance of your annuity is directly connected to the performance of your investment choices meaning you can lose money if your investment choices don’t perform well. The fees charged in your variable annuity are subtracted before any results are credited to your account.  Variable annuities are sold by a disclosure prospectus; make sure you fully understand how the variable annuity works and the fee structure.

About the Author:

Bill Broich
Bill Broich is a well-known annuity expert with over 30 years of experience. He has written hundreds of articles on annuities and other financial topics, and has been a featured commentator on TV, Radio and the Internet. To follow Bill's profile, click here.