| Annuities: The Three Types and How They Differ |
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| Written by John C. Ryan |
| Thursday, 18 February 2010 14:35 |
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If you're looking at an annuity as a way to invest your funds, you may find that your head will swim as you find there are more types than you expected. The primary types of annuities are fixed annuities, variable annuities and indexed annuities. Within each of these types of annuities you'll find immediate annuities and deferred annuities. Once you go even deeper, there's a volume of different products from a variety of different companies.
If you're looking at an annuity as a way to invest your funds, you may find that your head will swim as you find there are more types than you expected. The primary types of annuities are fixed annuities, variable annuities and indexed annuities. Within each of these types of annuities you'll find immediate annuities and deferred annuities. Once you go even deeper, there's a volume of different products from a variety of different companies. All annuities have certain features in common. One of those features is the tax-deferred growth. As with any benefit given by the government, there's also a downside. If you remove any funds from the annuity before the age of 59 , you have to pay taxes and a 10 percent penalty on the growth. Since the distributions from an annuity follow the LIFO rules, last in, first out, interest is always the first thing the IRS considers you to remove. The easiest way to narrow down the selection is to decide exactly what you want in your product. Fixed annuities are probably the easiest to understand. These products are often compared to CDs. The fixed annuity pays a fixed rate of return, there's no risk to the principle because of market fluctuations and like a CD, and after a specific period you can remove the cash value penalty free. Unlike CD's, annuities proffers the capacity to expel the funds before give in penalty ends. Though most CD's and annuities are giving the opportunity to take away the interest every year, certain fixed annuities also give the right to occupy principle. The more liberal schemes let you to get rid up to 10% of the fund value every year. If a subscriber doesn't make use of it then he will not lose the thing, but will surely add on to the percentage in the coming years. Though the variable annuities also do have a fixed money value within it, this type of annuity mostly deals with mutual fund deposits as their funding vehicle. In variable annuities, principle oscillates unlike fixed annuity. Certain variable annuity dealings guarantees clients with riders which give some percentage of return each year or to a minimum give back the premium without considering the market conditions. These riders of course will charge a small amount each year but are very significant in dropping market values. Unlike the mutual funds outside of variable annuity contracts, the owner can switch to different families of funds within the contract without paying a load each time they switch. Because of the tax deferred status of the variable annuity, switching from fund to fund does not trigger a taxable incident. Another third type of annuity is the index annuity which is a hybrid of the other two annuities that is fixed annuity and variable annuity. Even though it provides a guaranteed rate of interest it is lower than any fixed annuity as there is much potential for further growth. The annuity belongs to a particular index; might be international stock index or S & P 500.As index increases, the client will receive a part of the growth depending on the degree of participation and the contract. Like the fixed and variable annuity, each contract varies. All types of annuities do give some access to funds but the details of each vary from company to company. Within these three types of contracts, you also have the ability to take an immediate annuity or a deferred annuity. The difference is whether you begin an income immediately or simply allow the funds to grow, potentially taking an income later if at all. An annuity expert could help you to go through all possibilities. Good guiding sites are available via internet, which not only specifies how annuities works but also gives you annuity quotes which makes you eligible to take perfect and more informed decisions regarding your investments. |