Annuities are unique investment tools that are used for growth – and to provide guaranteed income. They offer predictable returns, tax deferral, and are commonly used to create steady streams of income in retirement.
There are different types, however, which carry different levels of risk and reward. Some are more designed for growth and accumulation, while others are better for income now or in the future. Which annuity is right for you?
What Is A Fixed Annuity?
Fixed annuities offer a set interest rate that remains the same through the terms of the contract. The interest rate might be lower than on other types of annuities, but the risk is low, and the reward is predictable. This means the insurer will pay a guaranteed rate on your contributions to the annuity for a designated amount of time.
Fixed annuities are a “set it and forget it” kind of investment tool – everything is set up front in the contract. You know what to expect once the investment matures. Since there is no stock market exposure with these products, you don’t have to worry about losing value. Your principal and interest gains are always safe, insured and protected.
Money withdrawn is taxed as ordinary income and does not benefit from lower capital gains rates. Fixed annuity accounts are a great tool to supplement your investment portfolio.
What Are Variable Annuities?
Variable annuities provide investment flexibility. They allow you to choose different funds in which you invest your contributions. These are called subaccounts. Those include stock mutual funds, bond mutual funds, money market funds, and stable income value mutual funds, among other investments. You can transfer money from one subaccount to another depending on the rules from the annuity provider.
Variable annuities contain two phases – an accumulation phase, which is when the contract can increase in value, and the payout (or distribution) phase. This is when you can receive your funds and any gains as a stream of variable payments, or as one lump-sum payment. You have the ability to designate how long the payments will last, be it a set period of years or indefinitely. You won’t pay tax on earnings until the money is withdrawn from the annuity.
While other benefits include a potential inflation hedge, death benefit payout, and initial investment protection, there is no guarantee your investment will earn interest or grow. You must make decisions about your subaccounts.
Usually there are commissions and fees that accompany this type of investment product. This is a good investment tool for younger investors as there is time to ride out ebbs and flows of the market in order to increase the value of the annuity investment.
What Is A Fixed Indexed Annuity?
Can’t decide whether a fixed or a variable annuity is best for you? A fixed indexed annuity carries characteristics of both products. It offers lower risks than variable annuities, but higher potential rewards than fixed annuities.
The interest rate will remain at an initial set amount unless an associated index, such as the stock market, performs well. In that case, your growth will be higher than the designated rate.
A strong stock market performance increases the value of the annuity. It provides a better rate of return than a certificate of deposit, but he gains are usually capped. They do not always reflect the entire value of the increase. Insurance companies build-in any fees and commissions. They won’t decrease the value of your investment.
Indexed annuities are conservative investment products that offer a guaranteed minimum rate or return with the potential to outperform traditional fixed accounts.
The first step in choosing which annuity is best for you is to speak with our insurance professionals here in Columbus, Ohio. We’ll help your outline your goals, discuss your risk tolerance, and explain how these unique contracts can provide for your financial well-being.