Defining Fixed, Immediate And Equity Indexed Annuities

By Author: Ryan O'Donnell
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Selecting a financial investment tool is no easy task. Naturally, you want to find the one that will give you the highest return on your money; however, it's not always quite that simple. There are various types of annuity investments, each linked to different market mechanisms, with different associated risks and returns. To understand which investment is best suited to you, it's good to have knowledge about the different types of investment.

What is a Fixed Annuity?

A Fixed Annuity is generally considered to be one of the more conservative savings mechanisms available and a good way to accumulate wealth in the longer term. Essentially, a fixed annuity is an investment for a set period of time with a guaranteed rate of return. In most cases, you can make interim withdrawals of the interest earned on the fixed annuity policy before the investment term is up. Other Fixed Annuity policies allow you to withdraw between 10 and 20 percent of the capital investment from the policy without incurring penalties. This means that if you need to access the funds to pay for unforeseen medical expenses, for example, you are ...
... able to do so.

There are two types of fixed annuities: A Traditional Fixed Annuity and a CD Fixed Annuity. The CD Fixed Annuity is so named because it is very similar to the Certificate of Deposit type of investments offered at most banks. They are also the simplest form of annuity, offering the same guaranteed rate of return for the entire set investment period. An advantage of this type of investment is that you can easily calculate your return for any given year or period of time. A traditional fixed annuity is similar in that it still has a set contract term. The difference is that the guaranteed rate of return is not for the entire period of the contract. If a contract term is 10 years, for example, then typically the rate of return will only be guaranteed at a fixed rate for the first two or three years. Thereafter it will revert to a market-related interest rate for the balance of the contract term. There is usually a minimum rate attached to the agreement to protect your investment.

In a traditional fixed annuity you can benefit from a tax referral. You will only pay taxes in the years when you actually withdraw the interest on the investment or when the contract period is up and you withdraw the funds. It's important to note that a CD fixed annuity does not have the same benefit; you are taxed each year on the investment regardless of if you withdraw funds or not. On the whole, fixed annuities are considered safe long-term investments, and a simple way of accumulating wealth over time.

What is an Immediate Annuity?

One of the oldest forms of annuity, this type of investment provides the investor with a fixed stream of income over a lifetime based on an initial lump sum investment. The immediate annuity is deemed a good investment for retirees who require a monthly income. Origins of Immediate Annuities date back to Roman times and there are several factors that determine what the fixed payout will be. These factors include period of investment until payment is required, types of payout options, age, sex, and the actual value of the initial investment.

Women for example have a longer life expectancy than men so they will receive a lower payout. While no one knows exactly when they will die, there is a general term of life expectancy. Older people will therefore receive higher payouts as their life expectancy term will be shorter than that of a younger person. Naturally, a higher initial lump sum investment will result in higher payouts over time. For the payout options, if you choose a single life or straight life payout option then the insurance company pays you for as long as you live. This is at a higher level of payout and will benefit you if you live to a ripe old age. But this will not benefit your beneficiaries if you pass away after only a few years as the insurance company will keep the balance of the investment. A way to protect your beneficiaries is to have a period-certain term. The advantage to this type of payout is that if you pass away sooner than expected, your beneficiaries will receive the payouts for a remainder of the contract period. If, however, you live much longer than the contract period, the payments will cease when the contract period is up and you may be left without an income. You should therefore give the various payout options due consideration.

What is an Equity Indexed Annuity?

An Equity Indexed Annuity is a Fixed Annuity investment that is linked to the performance of a financial index. It carries with it the associated risks of stock market volatility but if properly invested can result in the highest level of annuity returns. Interest is calculated as a result of the changes in the index and paid into your account on a regular basis. These investments generally still offer a guaranteed minimum interest rate, and limited withdrawals can be made from the account as needed. Some additional benefits of Equity Indexed Annuities are that the investor is not taxed until such time as funds are withdrawn from the account. You cannot outlive Equity Indexed Annuities and they will provide you with a guaranteed stream of income. There are also mechanisms in place that allow you to limit your risk and protect your investment to a degree if the market declines. This type of annuity is suitable for people who are looking to make a long-term investment provision for retirement and take advantage of the tax deferral benefits. You can also use this Equity Indexed Annuities to complement retirement policies if you feel they will not adequately provide for you.
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