Fixed Annuities & Variable Annuities are two common types of what is called “Deferred Annuities”. Unlike the immediate annuity that we discussed on Friday, these types of annuities are designed to grow your capital in a tax deferred manner before then being used to provide a lifetime income. Let’s look at both types…
A fixed annuity pays a set rate of interest. You can think of it like a bank’s CD offerings because it’s in some ways similar, but also has some other advantages (& one disadvantage if you’re under 59 ½). You can buy a fixed annuity that pays a set rate of interest. It might also pay you a bonus up front before this interest is applied. In future years, the interest might go up or down depending on what interest rates in the market place do. There is typically a guaranteed minimum rate. This is a guaranteed product that will always grow.
You can also lock in a multi-year guaranteed interest rate with another type of fixed annuity. In this case, you know your rate won’t go down over that set period of time.
You’ll find that the interest received on an annuity will typically be far higher than on a bank CD. Also, the tax on the interest is deferred until you elect to receive it which allows you to earn more interest on the interest which wasn’t taken in taxes each year.
A variable annuity has the same tax deferral benefits as a fixed annuity, but instead of just having one fixed option, it has a multitude of sub account options. These different investment style sub accounts offer the risk and potential reward of investing in different markets. The choices are typically in the stock market or bond market, although more and more options are being designed with options like commodity futures or hedging strategies.
There are of course additional fees for these options as the management of each different money management firm must get paid.
This type of annuity does offer some guarantees, but it does not guarantee your principal the way most annuities do. Likewise, it offers the most potential upside if the subaccounts perform well for you.
Next, we’ll look at Fixed Index Annuities which offer the same guarantees and safety that a fixed annuity does, but with growth potential that can be far greater.
This is the 7th post in our series of innovative new insurance products. You can find the previous posts at: 1) Innovative Insurance, 2) Long Term Care, 3) Long Term Care Solutions, 4) Free Long Term Care Insurance, 5) What is an Annuity?, 6) Immediate Annuities, & 7) Fixed & Variable Annuities.