Annuities have become a part of the retirement and investment plans for several Americans. An individual can invest in any amount of an annuity and have that money grow until it is needed to provide income for retirement.
Our team at The Legacy Group supports customers in obtaining the right annuity offered by the right insurance company, and provide a long-term income through a stream of future payments. Let’s quickly understand the different types of annuities available in the market:
- Fixed: The fixed annuity is like a bank certificate of deposit. Similar to a bank deposit, the insurance company would guarantee you a certain interest rate for a set period, often five years or even longer. After your guarantee rate runs out, the insurance company will continue to pay interest on your annuity based on company’s earning on its investments. The fixed annuity would then have a declining surrender charge schedule for a certain period after the purchase date. And what is a surrender charge? A surrender charge is a fixed percentage of the annuity value kept by the insurance company if the annuity is closed during that period. Note that under the fixed annuities, there are several different combinations of rates and surrender charge period that you can choose from.
- Fixed Indexed: A fixed index annuity (also known for tax-deferred benefits) is where you build a contract between you and your insurance company, and your insurer guarantees you a minimum interest rate, guaranteed payments through annuitization in retirement and a tax-deferred growth. This unparalleled combination of benefits can make this type of annuity an ideal low risk income of your long-term retirement plan.
Do I need to pay taxes?
Yes, but income tax on your investment is not charged during the investment period. The tax payment is postponed until you start receiving the periodic payments.
How is it different from the Fixed annuities?
Fixed index annuity is just a part of the fixed annuities, but here you receive interest on your investment based on changes in a market index and then measures how the whole market or part of it performs. All guarantees are based on the ability of the issuing insurance company to pay for your claims.
The interest that would be credited to your policy is affected by the changes in the index over the crediting period, not the independent index itself. Note that the credited annuity is not an investment. While changes in the index affects the indexed interest credited to your annuity, a fixed index annuity is not an investment in the stock market and does not participate in commodities, currencies, equities and fixed income.
Variable: With the Variable type of annuity, you will get to choose the investment and based on the performance of that investment, you would earn your returns. A contract is made between you and the insurance company, where the insurer would make periodic payments to you either immediately or at some future date. Depending on your risk tolerance and return levels, you can choose an investment that suits your needs.
What are the advantages?
When compared to a fixed annuity, you will see that a variable annuity will boost your investment by giving you an option for long-term capital growth. They do so by letting you make an investment in anything from half a dozen to 25 or so mutual-fund-like portfolios called subaccounts. Just like the fixed annuities, you can escape your taxes until withdrawal. The huge growth potential makes variable annuity more likely to surpass inflation when compared to a fixed annuity.