Annuities, The Big Three: Fixed Interest, Fixed Indexed, and Variable
Annuities offer numerous options
Fixed Interest Annuities
Have you ever bought a savings certificate from a bank? A fixed interest annuity is similar, except it is purchased 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 fundamental difference 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 range 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 receiving 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 (market risk) 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 can be monthly, 1 year, or 2 years in most situations.
A Fixed Indexed Annuity is like investing in a stock market index (partial participation), but without any exposure to market risk. Annually when the credited interest (or yield) on your funds is calculated, the total value of your account (principal and interest) is now fully guaranteed and free from additional market risk. Your gains will go up and down with the index; however if the index fails to gain over your period, you will never participate in any downside.
Here is a video that explains how a Fixed Indexed Annuity works, just click on the link.
A variable annuity is a security sold by licensed security salespeople accompanied by a prospectus.
A variable annuity is similar to investing in mutual funds, these funds are known as subaccounts. 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. Usually, 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.
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