Annuities

Annuity is a contract

An annuity is a contract between an insurance company and an insured individual. It states the conditions under which an individual will make a lump-sum payment or series of payments. On the other side of the agreement, it will also contain the statement for obligations of the insuring party to make intervallic payments to an insured person or his or her beneficiary at a future date or immediately.

Types of Annuities

There are two main types of annuities – fixed and variable. The difference between these types of annuity is reflected in the way funds in one’s account are handled.

Fixed Annuities

In case of fixed annuities, the account holder will earn a minimum rate of interest as his account is growing. The insurer will guarantee that the periodic payments will be a fixed amount per dollar in one’s account. The time span during which these periodic payments are to be made can be definite, such as a number of years, or indefinite, such as one’s lifetime.

Variable Annuities

On the other hand, in case of a variable annuity, an individual may choose to invest payments into a number of different investment alternatives. One of the most popular perhaps is mutual funds. If this is the case, then the return rate and the amount of the periodic payments will vary. It will depend on the performance of the selected investment options. There is also a special type of a variable annuity – equity-indexed annuity. The return rate during the accumulation period will depend on changes in an equity index. But a minimum return will be guaranteed by the insurance company. Therefore equity-indexed annuities are a combination of both types and should be studied separately.

When it comes to securities, variable annuities are regulated by SEC and are considered securities. In contrast, fixed annuities are not securities and are not SEC regulated.

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