The following is a description of the most common types of annuity products available today.
Fixed Annuities
Fixed annuities have a minimum interest rate guaranteed by the issuer. Normally included is a minimum annuity benefit guarantee. With a fixed annuity, the focus is on safety of principal and stable investment returns. The fixed-rate annuity is very similar to a bank CD, but it does usually provide a higher minimum interest rate while also providing increased security. Because its fixed, the annuitant receives this fixed amount no matter if the market goes down, interest rates decline or the insurer has an unprofitable year. Fixed annuities are a secure and safe, no-risk investment which makes them popular with individuals seeking little ambiguity in their investment returns.
Variable Annuities
Variable annuities allow flexibility in how the owner invests the annuity premium. With this product the insurer does not share in profits of the investments or protect losses. Variable Annuities are similar to stocks or mutual funds in investment risk. If the securities the annuity is based on go up, the annuitant keeps all the gains. But if the investment incurs losses, the annuitant is responsibe. The market for this product is those investors that are aggressive while seeking investment flexibility.
Immediate Annuities
Immediate annuities are those with fixed or variable payments on a monthly, quarterly, annual or semi-annual basis. The fixed option guarantees a set income with no variance. The variable option however, is tethered to the performance of selected investments that the annuity is based on. The amount received depends on both the duration of the annuity and its initial premium deposit.
Equity Indexed Annuities (EIAs)
EIAs are a unique product. Returns are gained through one of two options; either the greater of an annual set minimum rate (ie 3%) or equal to a stock market index return (i.e. Standard & Poor’s 500 index), reduced by some expenses and formulas. If the chosen index rises sufficiently during a specific period, a greater return is credited to the contract owner’s account for that period. If the index does not rise sufficiently, or even declines, the lower minimum rate is credited. The principal amount as a return is also guaranteed if the annuity is held for a minimum time period.
