Taking The Confusion Out Of Annuities

By Author: Simon Cronje
Total Articles: 18
Comment this article

What are Annuities?

Annuities are contracts between the insurance company and a person investing in a retirement income plan. They come in all shapes and sizes to fit the divergent types of consumers whose needs they serve. Having the right information about annuities in an understandable format will help you decide which annuity you may want to purchase.

Annuities can be purchased in two different ways. An investor can pay one large sum of money to purchase a single-premium annuity. Once this type of annuity is chosen, further contributions are not possible. The investor will have to purchase a new annuity.

Flexible-payment annuities can receive ongoing investment of funds. The investor is free to decide the time intervals between contributions to their annuity.

Fixed Annuities

A guaranteed interest rate offers conservative investors the stability they want in a fixed rate annuity. The guaranteed rate lasts for a specified period. Once the first period is over, a rate adjustment occurs for the next period. The Federal Deposit Insurance ...
... Corporation (FDIC) backs some forms of investments. Unfortunately, The FDIC does not guarantee annuities. Instead, the strength of annuities lies in the financial stability of the issuing insurance company. Before purchasing your annuity, speak with your broker about the financial rating of the insurance company providing your annuity contract.

Variable Annuities

Variable annuities have fluctuating rates of return based on investments in stocks, bonds, or money market accounts. Somewhat similar to mutual funds, variable annuities offer a high rate of return if the fund your money is in performs well. A downturn in the market will bring a decrease in the principal and interest amounts of your annuity. These investments are higher risk because you can lose ground not only on your interest, but also on your original investment.

Variable annuities offer a wide range of investment options. Some have a fixed account option. Similar to a fixed annuity, fixed account option variable annuities guarantee principal and interest. You can take some of your money and put it in a higher risk account while saving the rest in a more stable low risk account. Asset allocation programs are available in some variable annuities. These programs help you decide where you should place your money based on your circumstances.

With variable annuities, you can move your money between funds while maintaining your tax deferred status. In other words, you can take your money out of a high-risk account, and transfer it to a low-risk account within the same annuity while avoiding a tax payment on that money. This allows you to switch your money to take advantage of market trends without the worry of additional taxes.

Expenses of Variable and Fixed Annuities

There are higher fees associated with variable annuities than with fixed annuities. Some companies take the cost of annuity expenses and fees into consideration when they decide the periodic interest rates they will pay investors for their fixed annuities.

Fees for variable annuities are more complicated. Companies may have an annual contract charge for administrative and surrender fees along with a mortality and risk expense charge. The risk expense charge helps cover the death benefit, expense level, and available payment options. Variable annuities also charge fees to pay for management and operating expenses. These fees may pay the fund manager's salary or printing costs for the fund prospectus.

A variable fund prospectus will be given to you prior to purchasing this annuity. Make sure to read it carefully before making your decision. The prospectus contains valuable information about applicable fees and other annuity details.