Annuity investments with immediate payout begin payments to the investor immediately, whereas the deferred payout means the investor will receive payments at a later date. An annuity with a fixed investment type offers a guaranteed return on investment by investing in government bonds and other low-risk securities. A variable investment type means the return on the annuity investment will depend on performance of the funds (called sub-accounts) where the money is invested. This article will outline in more detail the fixed and variable annuities and the benefits of each.
Fixed Annuities
Fixed annuity investments are the idea that you give a sum of money to an insurance agency. In exchange, they promise to pay you a fixed monthly amount for a certain period of time. So essentially, you are converting a lump-sum of money into a steady income stream. With a fixed-period annuity, the annuity continues to pay until the end of the period is reached.
Fixed annuities also allow you some access to your investments. For example, you can choose to withdraw accumulated interest or up to 10 percent of the principal annually. Annuities can also have hardship clauses signifying an early withdrawal of all funds in certain extenuating situations. If you’re considering a fixed annuity, compare the annuity with a ladder of high-grade bonds that allow you to keep your principal with nominal restrictions on accessing your money.
Variable Annuities
A variable is essentially an insurance contract coupled with an investment product. Annuities function as tax-deferred savings vehicles with insurance-like properties. In other words, an insurance policy is used to provide the tax-deferral. A variable annuity invests in stocks or bonds and has no predetermined rate of return. It does offer a higher rate of return when compared to a fixed annuity.
A variable annuity is principally designed to be a tool for retirement savings. The main selling point of these annuity investments is the underlying investments grow tax- deferred just like an IRA account. This means that any gains (appreciation or interest) are not taxed until money is withdrawn from the annuity account. One of the other selling points with variable annuities is retirement savings. You can choose to have the annuity pay you an income called annuitization, based on how well the underlying investment performs. The insurance portion of the annuity may also provide certain investment guarantees. These guarantees may differ from one insurance company to another so you need to find out what specific guarantees each company offers with their annuity investments. A typical guarantee usually states that the full principal (amount originally contributed to the account) will be paid out when the account holder dies, even if the market value is low at the time.
Before making any investments into annuities, make sure you gather even more information. This kind of investment is not to be made on a whim. Look into the companies offering annuities and ask for other information not provided in this article. And it’s not just insurance companies offering annuities, but some mutual fund companies offer annuities as well, so you could look into finding information from them too.
By John Ivie