Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk or outliving one’s assets.

Fixed Annuities

As a rough comparison, a fixed annuity is similar to a bank certificate of deposit. When you buy a fixed annuity, the insurance company will guarantee a certain interest rate for a set period, often five years or longer. Once the rate guarantee runs out, the insurance company will continue to pay interest on the annuity based on what the company is earning on its investments. A fixed annuity will have a declining surrender charge schedule for five to seven years after the purchase date. A surrender charge is a percentage of the annuity value kept by the insurance company if the annuity is closed during the surrender charge period. These rate and surrender charge periods are typical, but fixed annuities are available with a wide range of rate and surrender charge combinations.

Fixed Index “Hybrid” Annuities

A Fixed Index Annuity also known as a “hybrid annuity” is tied to a common market index, such as the S&P 500, Dow Jones, or Russell 2000 and many more. Your annuity earns gains when the index rises and is performing well. And even if the index declines in value, your account is protected and cannot lose value. This is what makes a fixed index annuity the preferred financial vehicle for securing retirement. You can enjoy the gains of the stock market without the market risk and no risk to your principal. The insurance company that issues your annuity will assume the market risk, and will provide a return when the index linked to your contract is positive. The gains you earn on your annuity are ‘locked in’ every year, and your account value can never decrease. Your principal is guaranteed to grow at a pre-determined rate in case the stock market has a down year and does not perform well. Annuity rates on fixed index annuities are usually substantially higher over fixed rate annuity returns and other retirement financial vehicles.

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An annuity is a long-term, tax-deferred investment designed for retirement that will fluctuate in value. It allows you to create a fixed or variable stream of income through a process called annuitization. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you are not yet 59½, you may also have to pay an additional 10 percent tax penalty on top of ordinary income taxes. You should also know that an annuity contains guarantees and protections that are subject to the issuing insurance company’s ability to pay for them. An annuity is a contract between you and an insurance company.

Provided content is for overview and informational purposes only and is not intended as
tax, legal fiduciary or investment advice.

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