Annuities

An annuity is a financial product that is sold by insurance companies, these products not only help you invest for the future, but most annuities sold by insurance companies also come with a death benefit included. Annuities have been extremely popular for decades due to their investment potential and the fact that annuities usually offer tax deferred growth on earnings.

Types of Annuities

While every insurance company may offer slightly different annuity products, there are usually three types of annuities. The first type of annuity is called a Fixed Rate Annuity, the second is a Variable Annuity and the third is an Equity Indexed Annuity. While all types of annuities offer their own advantages, choosing the right annuity product depends on your specific financial situation.

Fixed Rate Annuities

Fixed rate annuities are perhaps the most popular annuity product. With a fixed rate annuity you make an initial lump sum payment or a series of small payments in the beginning when setting up your annuity and the insurance company guarantees that you will receive a fixed interest rate on your investment over the course of the term. Besides offering you a fixed interest rate, most insurance companies also guarantee payments to be made in a fixed dollar amount (for instance a term of 20 years, payments of $400 per month).

Variable Annuities

Variable annuities are slightly different than fixed rate annuities. With a variable annuity, you choose to invest your lump sum payment made to the insurance company using a variety of financial vehicles such as mutual funds, stocks, bonds, etc. The rate of return is not fixed and is decided by how well your portfolio performs. The amount of payments that are made to you from the insurance company will change based upon how well your portfolio performs through the years.

Equity Indexed Annuities

Equity indexed annuities are also a popular annuity product. They are quite different from a fixed rate and even a variable rate annuity in that during the accumulation period (the period in which you either make a lump sum payment or make a series of payments) the future amount of your periodic payments by the insurance company is calculated based upon an equity index. One of the most common indexes used for calculating payments made to you by the insurance company is the S&P 500 Composite Stock Price Index. Once your payments are calculated you will be guaranteed a minimum return on your investment throughout your term.

Is an Annuity Right for You?

For many individuals and families an annuity can be an excellent way to invest money for the long term, receive tax deferred growth on earnings and even receive a death benefit. However, since everyone’s financial situation is different, it is always a good idea to either talk to your insurance agent or your financial planner to decide if annuities are the right choice for you.