Annuities

An annuity is a contract between you and the insurance company, where you make a lump-sum payment or series of payments over time. In return, the insurer agrees to make periodic payments to you beginning immediately or at a specified date. Annuities typically offer tax-deferred growth and may include a death benefit that will pay your beneficiary a guaranteed amount, usually at least your principal.

Three basic types of annuities

There are generally three types of annuities, fixed, variable and index. In a fixed annuity, the insurance company will guarantee that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse.
In a variable annuity, you can choose to invest your balance from a range of different investment options, usually mutual funds. The rate of return on your purchase payments, and the amount of the timely payments you will eventually receive, will vary depending on the performance of the mutual funds you have selected.

An index annuity is a special type of annuity. During the accumulation period, when you make either a lump sum payment or a series of payments, the insurance company credits you with a return that is based on changes in an index, such as the Dow Industrial or S&P 500 . The insurance company typically guarantees a minimum return. After the accumulation period, the insurance company will make payments to you under the terms of your contract, usually monthly, quarterly or annually. You can also choose to receive one lump-sum.

Variable annuities are securities regulated by the SEC. Fixed annuities are not securities and are not regulated by the SEC. Fixed annuities are basically like a bank CD and a life insurance policy rolled into one. Index annuities are a hybrid of fixed annuities and variable annuities.