Understand The Basics
Not sure what an annuity is? You are not alone. To help, we’ve put together information about annuity basics. If you have any questions, give us a call. We’re here to help you learn some of your retirement options.
Are All Annuities The Same?
Annuities all have a few basic things in common.
First, every annuity has some sort of option for receiving payments or income. While not all annuity owners use the income benefits of an annuity, many do. Second, an annuity is a contract between you and an insurance company. The insurance company sets out terms for that annuity agreement. Then, you put money into it. You also get to decide which annuity benefits you want. Third, annuities may be part of an overall retirement strategy for some retirees. This is because some annuities offer longer-term ways of possible retirement income.
Next, let's look at the different types of annuities.
Annuity Basics: Different Types of Annuities
Did you know that not all annuity products are the same? In fact, there are three distinct types of annuities:
With a fixed annuity, policy holders get a set rate of return on their money. These fixed options may provide regular rates of return. However, they do not have the potential to increase your rate. Therefore, this may mean that you may not see potential interest growth. Conversely, the annuity basics of a variable type may potentially see growth. However, your money is also at risk of loss with a variable annuity.
The Fixed Index Annuity (FIA)
An FIA is different than a fixed or variable annuity. In a way, the FIA has the “best of both worlds.” Like a fixed annuity, the FIA offers you protection* of your principal. However, the FIA offers another potential benefit: index growth potential. In other words, with a fixed index annuity, your principal is not subject to market loss. Yet, you may still see some growth when your annuity index(es) are up.
The Annuity Basics Of An (FIA)
Unlike some other retirement options, an FIA does not change due to the stock market.
Instead, a fixed index annuity (FIA) has a link with an index or with many indexes. This type of annuity is an agreement between you and an insurance company. Of course, this agreement has certain terms for both parties. First, you agree to deposit a certain amount of money into the policy. Next, you agree to allow the insurance company the opportunity to potentially grow the money for a period of time. During this potential growth period, you would not take an income. However, during the next phase of the agreement, you may be able to take money out. Typically, the next phase is called the distribution phase.
Once here, you may also see some index interest potential. One of the benefits of a fixed index annuity is safety. For example, the agreement protects your principal. Of course, this is based on the claims paying ability of the insurance company. But, as long as the insurance maintains their reserves, their agreement with you keeps your money safe. Even if your FIA’s index were to drop, your principal balance would not drop. On the flip side, if the index rises, you may be able to see some growth in your FIA. Therefore, an FIA may provide both protection as well as potential index interest.
Is There A Downside To A Fixed Index Annuity?
Like all retirement options, a fixed index annuity (FIA) is not for everyone.
For example, an FIA may require you to have a certain amount of total assets. Also, you may not keep all of your wealth in an FIA. Instead, you may only keep some of your money under the protection of this type of product. In addition, the annuity basics of this product mean you may have potential index interest. Yet, you may not see the entire interest growth that other options may have. For some retirees, this is a “trade-off” worth making. However, for others it may not be. For example, if you are ok with high risk.
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