- Are Annuities For You?
- Types of Annuities
- Understanding the Fees
- Things to Consider When Selecting an Annuity
Annuities can be single premium annuities or flexible premium annuities. Single premium annuities accept only an initial deposit into the contract. There is a minimum premium amount. If the deposit comes from qualified money (a distribution from a company retirement plan), the minimum premium may be lower. If you want to deposit more money later, you have to fund a new contract. At the time of deposit, you request a maturity date at which time the accumulated funds can either be distributed to you in a lump-sum settlement or can be annuitized (distributed in systematic payouts). You must choose a maturity date by a maximum age set by the company, usually at least age 85.
Flexible premium annuities allow you to make periodic deposits (premium payments) into the contract. You can elect to have automatic monthly withdrawals made from your checking account or make contributions whenever you like. With these annuities, you can take advantage of dollar-cost averaging: When you invest an equal amount of dollars in the annuity on a regular schedule, you purchase more units when the price is lower, and over time end up paying on average less per unit. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
Both single and flexible types can be either fixed or variable annuities:
Fixed annuities offer you a guaranteed* rate of return* and guaranteed* periodic payments, for either a fixed period of time, or an indefinite period of time, such as your lifetime or the lifetime of your spouse. If it is a fixed period, at the end of the period, the company will declare a renewal rate, which may be lower than the initial rate but guaranteed not to fall below a minimum guaranteed* amount. Rates declared may be based on current market rates, tied to certain indicators, or tied to the company's investment portfolio.
*Guaranteed by the claims-paying ability of the insurance company.
IMPORTANT NOTE: Beware of annuities offering higher initial guaranteed rates than most similar type annuities. This sometimes means high risk, signaling that a company is headed for trouble. The company may be sacrificing the quality of their investments, which increases your risk.
See the section on Fixed Annuities for more information.
Variable annuities shift the burden of investment risk from the insurance company over to you. Rather than receiving a fixed rate based on the company's portfolio, your deposits go into one or more separate accounts called "sub-accounts." You have a variety of investment choices ranging from money market funds to stock and bond funds, similar to mutual funds. Your principal investment may be guaranteed* (for an additional fee), but your rate of return depends on the performance of your investment selection(s).
As with mutual funds, it is a good idea to diversify your investment among different types of variable annuity sub-accounts, in a process called "asset allocation." Variable annuities allow you to change your asset allocation, in response to market trends or personal circumstances, by making tax-free transfers between sub-accounts. Asset allocation does not ensure a profit or protect against a loss.
Variable annuities are considered securities under federal law, and can be offered only by agents who are licensed and who have passed specific securities exams.
A variable annuity is a contract between the investor and the insurance company, under which the insurer agrees to make periodic payments, beginning either immediately or at some future date.
See the section on Variable Annuities for more information.
*Guarantees are subject to the claims paying ability of the issuing insurance company.