One of the best retirement products on the market today is the annuities contract. This allows an individual to hand over money to the life insurance company and then get back such money over their life time on a growth and tax-deferred basis scheme. The insurance company calculates the amount they need to pay to you depending upon the type of annuity product you choose, the term of annuity you go for, and your age and gender as well. Coming with an option for a guaranteed distribution of income, such annuities are not that easy to understand and these complex investment vehicles seem to branch out into numerous types of annuities – each with its own plus and minus points.
Fixed annuities
In case of a fixed annuity, the insurance company pays you a guaranteed return for the money you invest with them. Such fixed annuities help you to receive a guaranteed amount of interest but with limited flexibility options. The interest that you gain is the tax deferred which you do not need to pay until you make a withdrawal. These types of annuities come with high surrender charges that might prevent you to withdraw money for a period of 5 years or more. If you choose to go for immediate fixed annuity, such payments will not fluctuate in tune with the inflation. Once you choose to go for such annuity scheme, you have no recourse to the principal and only the fixed streams of income such principal will generate.
Indexed annuities
In case of an indexed annuity, the insurance company pays you as per the stock exchange moves. In other words, your investment is linked directly to the equity index. The popular index used to measure such income is the Standard & Poor’s 500 Composite Stock Price Index. This type of annuity is more popular since it provides you an opportunity to make one of the best investments – not only do you get the chance to earn potentially attractive returns but also a guaranteed minimum return on your investments. This type of annuity is considered to be a ‘fixed’ annuity and the legal issues involved are minimum. In reality, such investment of yours is not actually invested in the stock market yet you are given a chance to earn a percentage of the index gains over a limited period of time.
Indexed annuities provide you a comfortable earning on your money invested with the insurance company. Unlike variable annuity products that must be registered with the SEC, there are no federal restrictions imposed with regard to indexed annuities. Even the brokers do not need any particular security license to sell them. The money you gain from such investments could be determined via annual indexing or some other methods. The top three advantages of such indexed annuities are:
- Provision against any loss of income in future.
- Rate of interest paid guaranteed.
- Provision for competitive rates of return.
Immediate annuities
Security and comfort are the major reasons why you should choose to go for immediate annuities. Though you have no recourse to the principal once you choose to go for such annuities, you can be assured of a good income stream for the rest of your life. This is especially a good way to make your investment in post retirement days. Even if your have not planned ahead for your retirement, such annuity contracts can help you to make the leap in time.
There are different types of immediate annuities like the fixed immediate annuity, inflation-indexed immediate annuity, and variable immediate annuity. If you choose to go for the fixed immediate annuity, the income you receive each month will remain fixed throughout the period of your annuity contract. In case of an inflation-indexed immediate annuity, you will receive a fixed annuity income that will rise each year based on a predetermined formula. This is also a type of fixed annuity contract. In case of a variable immediate annuity, there is no guaranteed stream of income promised to you and instead the amount of income you receive is directly related to the performance of the underlying investment portfolio. In such case the payment you receive will keep changing now and then and such amount may be reset at a particular time as per how your contract has been structured.
Advantage of variable annuities over other annuities
Fixed annuities provide you with a continuous flow of income. Such income is fixed and you cannot hope to earn any more than that over your investments. However that is not what most people are looking for when they invest their money in annual contracts. This is where variable annuities have an edge over the fixed and other types of annuities.
Variable annuities allow you to choose where you invest your money and also have potential to provide you with better returns. Although the risk associated with such variable annuities is higher, the returns also are going to reap you in more profits. Maybe this is why today variable annuities have won the popular race in retirement products and service section.