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Types
Home » Retirement » What is an Annuity? » TypesThere are two main types of annuities: fixed and variable. The fixed annuity guarantees a certain amount of money while variable annuities do not. Both types of annuities are safe, low yielding investments.
Fixed: A fixed annuity earns a guaranteed rate of interest for a specific time from the insurance company. The fixed annuity is advantageous because there isn’t risk involved with your investment. There are drawbacks because you may miss high interest rates that may be present through options of investing. When the guaranteed period of contributions is over, then a new interest is set for another set period. An annuity is not backed by the Federal Deposit Insurance Company (FDIC) like a Certificate of Deposit is. Fees are taken into consideration when the insurance company raises the interest rate or at the time payment amounts are determined.
Variable: This type of annuity offers funding and investment options. The options can include stocks, bonds and money market accounts. The variable annuity depends on the underlying investment options for return. The return is not guaranteed. If you are lucky and your annuity performs well, your money return may exceed the inflation rate or a fixed annuity. If you aren’t so lucky, you may lose prior earnings and some of your principal. Variable annuities also offer a fixed account option. This option guarantees principal and interest. This variable annuity is similar to a fixed annuity. An advantage to this option as opposed to the fixed annuity is the ability to divide your investment among low-risk option and high-risk options. In other words, diversify. One more option of a variable annuity is the ability to transfer money. You can transfer this money without accruing tax penalties. Again, if you collect on your investment early, taxes will be required. By transferring your money, you have the ability to ensure it is in the best possible account to earn the most amount of money. The variable annuity has more features and higher fees. Variable annuity fees are complicated and involve several charges including surrender fees, mortality and expense risk fees and administrative expenses.
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