Annuities critical in retirement planning

Within these two categories, there are there are three general types of annuities:

Fixed annuities: In a fixed annuity, an insurer agrees to pay an investor a specified rate of interest while the account is growing, and payments are a specified amount per dollar in the account. Periodic payments may last for a pre-determined period, like 30 years, or payments can stretch over an indefinite period, like over an investor’s lifetime. Fixed annuities aren’t considered securities and are not regulated by the SEC but are regulated by state insurance commissioners.

Indexed annuities: Returns for indexed annuities are based on changes in an index, like the S&P 500 Composite Stock Price Index. Indexed annuity contracts also typically specify that the contract value won’t be less than a specified minimum, regardless of index performance. During the accumulation period, when the investor makes a lump-sum payment or a series of payments, the insurer credits the investor with a return based on changes in a securities index, like the S&P 500 Composite Stock Price Index. An indexed annuity may or may not be considered a security, and most indexed annuities aren’t registered with the SEC.

Variable annuities: Variable annuities give investors the choice of purchasing payments from a range of different investment options, which are typically mutual funds that invest in some combination of stocks, bonds, money market instruments. The rate of return on the purchase payments and the number of payments an investor will receive vary depending on how the selected investment options perform. Variable annuities are regulated by the SEC.

Variable annuities allow individuals to receive periodic payments for life, or the life of an individual’s spouse or designate, protecting against the possibility of outliving assets. Variable annuities also come with a death benefit that guarantees a beneficiary will receive a specified amount at the time of an investor’s death. And variable annuities are tax-deferred, so investors pay no taxes on income and investment gains from the annuity until withdrawals begin, and then earnings are taxed at ordinary income tax rates instead of lower capital gains rates.

Fixed index annuities represent another annuity type. Fixed index annuities, or FIAs, provide investors with the benefits of a fixed annuity while being linked to an equity index, like in an indexed annuity. Fixed index annuities (FIAs) can be either immediate or deferred, and have a number of benefits. For instance, since they’re linked to the return of an index, they offer the possibility of earning extra interest.

Investors need to research annuities in general prior to including them in an overall retirement strategy. In addition, investors should thoroughly research each annuity before making the final investment decision. Agents armed with general information on annuities, and with information on particular annuity types, can go a long way toward helping their clients understand the various types of annuities and matching investors to the optimal product to match their long-term goals.