Different people hold varying views about a fixed annuity investment scheme. Getting advice from such people can actually confuse you as you decide on how to secure your retirement days. However, after reading this article, you should have a better understanding of different annuities and such a decision will be an easy one for you.
To begin with, all these annuities are types of insurance investment schemes. Therefore, once you enter into a contract with such a financial institution, you will have to deposit your principal amount first. After the agreed duration, the firm starts paying you as per the contract dictates. There are three main categories of annuities: fixed, variable and indexed annuity categories. Let us consider each of them at a time.
With the fixed category of annuities, the financial institution invests your money in schemes such as bonds and mortgages, which are also known as debt-investment. These are the sources of your investment’s interest. If you are a conservative person, then this is your most appropriate annuity. This is because you will not stand any chance of losing the money that you invest and there is always a minimum interest amount for you. The guaranteed interest varies every year. With the fixed annuity, you are supposed to receive payments from the insurer after your retirement. This means that once you deposit your principal, you have to wait for some years before enjoying the benefits of your investment. However, there is the subcategory of the immediate annuity, which allows you to start receiving these payments soon after making your deposit. The greatest advantages with the fixed category are the tax-free interest accumulation and lifetime payments.
The variable annuity works a little differently. To start with, you do not get any assurance of a minimum interest rate. This is because your return rates depend on the market trends for the equity based instruments in which the insurer invests your money. Actually, this annuity category is best suited for someone with sufficient knowledge in the stock markets. Therefore, he is able to choose the most appropriate instruments. Even though this investment’s returns vary with the markets, history has shown that barely do investors incur losses. One of the advantages of this scheme is that any interest that is earned will not be taxed up to the time that you withdraw it. Therefore, you will essentially have more principal than you should have so long as you are making profits. A second advantage is the fact that you can invest as much money as you would like. However, you can only deposit the money at once rather than in instalments.
With the index annuity, financial institutions place investors’ money in equities index such as S&P 500. Just like the fixed annuity, this scheme has an assured interest rate, which protects you from incurring losses when the market is performing poorly. However, when the markets are doing extremely well, you will not benefit from all the interests earned. This is because insurers place limits on the maximum interests earned. Just like the other types of annuities, interests earned from your principal are not taxed until the withdrawal time. Most people appreciate this feature, especially for the retirement plans. Another unique feature with this investment is that you are supposed to deposit your principal in a single premium. Finally, this annuity category has a participation rate. This rate defines the percentage of your investment that insurers will put in the equity index.
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