Annuity Basics

When you think about the years ahead, what are you looking forward to?

For most people, the answer is a nice balance of favorite pastimes, new adventures, busy, and tranquil moments. Balance is also important in your financial life, between reward and risk, nest egg preservation, and growth. No one knows what the future holds. That's why Indexed Annuities attract the attention of retirement savers looking to achieve some balance, and piece of mind, no matter what happens in the financial markets. In 2008 and 2009, Americans lost an unprecedented amount of retirement savings because of stock market volatility. Those who owned Indexed Annuities, lost nothing.

So what are Annuities? and specifically Indexed Annuities?

All annuities are basically a contract between you and an insurance company. You pay for the annuity in either a single lump sum, or multiple payments over time. In return, the insurance company promises to pay you money from the annuity in a single or series of payments. Like many other longer-term financial products, annuities have a surrender fee for early withdrawal. The terms of which depend on your contract. There are two categories of annuities, Fixed and Variable. With Variable, the consumer assumes the risk for the annuities value. And with Fixed, the insurance company assumes the risk.

An Indexed Annuity is a type of fixed annuity, but it has a distinct way of calculating annual interests, using a formula based on changes in the performance of a stock, bond, or commodity index. The index is used as an external benchmark, you do not actually invest in it, while the interest you earn and when you get it depend on the features of your particular contract. Generally Indexed Annuities have an interest rate floor, a participation rate, and a cap, that determine the amount of interest you earn. Your interest earning rate always remains somewhere between the floor and the cap. It does not rise above the cap even if the index goes higher. Conversely, it never falls below zero even if the index goes way down, so the value of your money will never decline for as long as it is in the annuity, but it can increase with the rising index. Once interest is credited, it also can never be lost due to interest rate adjustment or negative market fluctuations, and it may even compound. That means more potential growth than other fixed annuities or simple savings plans, and less risk than variable annuities an other more volatile investments, bringing some balance to your retirement plan.

Like all annuities, the index type offers tax deferred growth. You aren't taxed on interest earnings while your money stays in the annuity. The process of choosing an index annuity can also give you peace of mind. These financial products are backed by some of the world's largest most reputable insurance companies, and can only be sold by licensed insurance professionals, who are mandated to receive product specific training. Companies are required in most cases by the state's insurance department to ensure that every indexed annuity sale is suitable for the customer's age, financial situation, and goals. And while agents are paid commissions, no sales compensation is ever deducted from your annuity principle.