What is an annuity?
The greatest reason annuities are misunderstood by the public is the media’s perpetual distribution of inaccurate information. Misinformation about fees, commissions and surrender charges is rampant, even in respected publications.
– Life insurance guards against the risk of dying too soon, while annuities guard against the risk of living too long.
– An annuity is the only financial instrument that can guarantee you a paycheck for the rest of your life, no matter how long you live.
– There are two main types of annuities: deferred annuities and immediate annuities.
– Deferred annuities allow you to defer taking an income until you have accumulated additional earnings.
– Immediate annuities allow you to commence income payments within the first year of the annuity purchase.
– There are two sub-types of annuities: fixed and variable.
– There are also two sub-types of fixed annuities: traditional fixed and fixed-index.
– Fixed and fixed-index annuities are insurance products. Variable annuities are investments.
– You can’t lose money as a result of market performance with fixed and fixed-index annuities.
– Fixed annuities earn interest at a stated rate, which is declared periodically by the insurance company.
– Fixed-index annuities earn limited interest, based on the performance of a stock market index.
– The most common stock market index used as a benchmark of index interest on fixed index annuities is the S&P 500.
– Fixed-index annuities generally limit the amount of index interest earned via the use of a participation rate, cap rate or spread rate.
– Fixed-index annuities do not allow the purchaser to invest directly in the index.
– Fixed-index annuities are not a “hybrid” of fixed and fixed-index annuities.
– The index-linked interest on fixed-index annuities is provided through an instrument the insurance company purchases, called an “option.”
– Dividends on the S&P 500 (and other indices) are not included in fixed-index annuities’ crediting calculations because the purchaser isn’t actually invested in the index.
This article shares excerpts from 100 facts people need to know about annuities by Sheryl J. Moore of Moore Market Intelligence
Read more at The Huffington Post