Fixed and Indexed Annuities
An annuity is a contract with a Life Insurance company. The Life Insurance Company will deposit money into a "general" account, if the investor wants guaranteed returns. The client can also chose an Indexed Annuity if they want to have the opportunity to potentially receive a higher crediting of interest based upon the Index used inside their Annuity. If they chose to invest in the General account with a guaranteed rate of return, they are more than likely purchasing a fixed annuity. If they are investing in the General account with varying returns based upon an index, they are purchasing an Indexed annuity. A fixed annuity is designed for a client, such as a retiree or a very conservative investor who wants a guaranteed interest rate. Often clients who invest in a CD are looking for a conservative place to invest their money.
Most fixed annuities offer a higher guaranteed interest rate than a CD, but will also grow tax-deferred. Fixed annuities, like bank instruments, are subject to inflation risk. Inflation risk is the possibility your money and its earning potential will not out perform inflation. An Indexed annuity is designed for a client who wants to partake in the upside of the economy by using index based crediting rate of return. Most Indexed annuities offer a variety of Indexes to choose from, such as the S&P 500, Dow Jones Industrial and Nasdaq Composite.
Equity Indexed Annuities are not federally regulated. While the return is based on the performance of the index, you do not get the full benefit in a rising market. The performance of an index is not indicative of the performance of any particular investment. Individuals cannot invest directly in any index. Also, please be aware that a participation rate, asset fee, or interest rate cap are some of the features used by indexed annuities to determine how much potential gain will be credited to the annuity. Be aware that these features can change annually so investors must carefully evaluate a contract to evaluate these factors that can affect the investment return. An equity indexed annuity is intended to be a long-term savings vehicle. Even though you have access to your money should you need it, you may be subject to substantial penalties for withdrawing money before the end of your term is over. Earnings are taxable as ordinary income when withdrawn.