Did you know that an annuity can be used to systematically accumulate money for retirement purposes, as well as to guarantee a retirement income that you cannot outlive?
In planning for financial security in retirement,
an annuity can help satisfy two basic objectives:
To accumulate retirement assets on a tax-deferred basis.
If you're already contributing the maximum to IRAs and any employersponsored
retirement plans and need to save more for retirement, a deferred
indexed annuity may be the answer to your retirement savings need.
To convert retirement assets into an income that you cannot outlive.
On the other hand, if you're near or at retirement, an immediate income
annuity can be used to convert existing retirement assets into a lifetime
An annuity is a long-term savings plan that can be used to accumulate assets on a
tax-deferred basis for retirement and/or to convert retirement assets into a stream
While both are insurance contracts, an annuity is the opposite of life insurance:
Life insurance provides financial protection against the risk of dying
An annuity provides financial protection against the risk of living too long
and being without income during retirement.
There are two basic types of annuities, depending on whether you need to
accumulate assets for retirement or whether you're at or near retirement and
interested in creating a lifetime retirement income:
A deferred annuity has two distinct phases: the accumulation
phase and the income phase.
During the accumulation phase, you contribute
premiums to the annuity, where they accumulate on a taxdeferred
basis until needed for income purposes.
During the income phase, the value of the annuity is
converted into income payments.
Immediate Income Annuities
An immediate income annuity is purchased with a single
premium and income payments begin immediately or
shortly after the premium is paid.
Depending on your investment objectives and risk tolerance, there are a variety of
ways that you can choose to invest your annuity premiums:
Fixed Interest Annuities
A fixed interest annuity pays a fixed rate of interest on the premiums
invested in the contract, less any applicable charges. The insurance company
guarantees* that it will pay a minimum interest rate for the life of the
annuity contract. A company may also pay an "excess" or bonus interest
rate, which is guaranteed* for a shorter period, such as one year.
During the accumulation phase of a variable annuity, premiums less any
applicable charges are placed in a separate account of the insurance
company, where the annuity owner can invest them in one or more stock and
bond subaccounts. During the income phase of a variable annuity, the
amount of each income payment may be fixed and guaranteed*, or it may be
variable, changing with the value of the investments in the separate account.
An indexed annuity has characteristics of both a fixed interest annuity and a
variable annuity. Similar to a variable annuity, the insurance company pays
a rate of return on annuity premiums that is tied to a stock market index,
such as the Standard & Poor's 500 Composite Stock Price Index. Similar to
fixed interest annuities, indexed annuities also provide a minimum
guaranteed* interest rate, meaning that they have less market risk than
variable annuities. Since the minimum guaranteed interest rate is, however,
combined with the interest rate linked to a market index, indexed annuities
have the potential to earn returns better than fixed interest annuities when
the stock market is rising.
A Closer Look at Equity-Indexed or Indexed Annuities ^Top
The indexed annuity is a hybrid of the fixed interest annuity and the variable
The insurance company pays a rate of return on your annuity premiums (less
any applicable charges) that is tied to a stock market index, such as the
Standard & Poor's 500 Composite Stock Price Index.
Similar to a fixed interest annuity, an indexed annuity also provides a
minimum guaranteed* interest rate, meaning that it has less market risk than
does a variable annuity.
An indexed annuity is an insurance contract and not an investment in the stock
market. Indexed annuities credit interest using a formula based on changes in the
index to which the annuity is linked. Any interest payable in excess of the minimum
guaranteed* interest rate is determined by a formula contained in the annuity
contract. This formula is determined by a variety of indexed annuity contract
Indexing Method: There are different methods used to determine the
change in the relevant index over the period of the annuity. The indexing
method used will impact the amount of interest credited to the contract.
Participation Rates: How much of the gain in the index will be credited to
the indexed annuity? If, for example, an indexed annuity has an 80%
participation rate, the annuity will be credited with only 80% of any gain
experienced by the index.
Spread/Margin/Asset Fee: An indexed annuity may contain a spread/
margin/asset fee instead of, or in addition to, a participation rate. If, for
example, an indexed annuity has a 3% spread/margin/asset fee and the
index gains 9%, the interest credited to the annuity will be 6%.
Interest Rate Caps: Some indexed annuities contain a cap or upper limit on
the amount of interest the annuity will earn. For example, if the cap rate is
10% and the index linked to the annuity gains 12%, only 10% will be credited
to the annuity.
Does it sound like a Fixed Indexed Annuity might be right for you?