ANNUITIES TYPES
FIXED ANNUITIES
VARIABLE ANNUITIES
EQUITY INDEXED ANNUITIES
FIXED ANNUITIES
In a fixed annuity, the insurance carrier:
◘ Declares a current rate of interest for a specified time period. Once the time expires the company will set a new rate which may be higher or lower than the original rate.
◘ Guarantees a minimum interest rate of return which is specified in the contract, and at no time may the current or renewal interest rate fall below it.
◘ Guarantees the principal.
VARIABLE ANNUITIES
A variable annuity has two types of accounts:
Fixed Accounts
In a fixed account, principal and interest are guaranteed by the insurance company. Interest rates are usually guaranteed for one year but can be longer.
Variable Accounts
◘ In a variable account, the annuity owner bears the investment risk. Policy values vary directly with market performance and may result in a loss of principal and prior earnings. Earnings are tied directly to the performance of various underlying investment vehicles which are available within the variable annuity and are selected by the owner.
◘ Variable annuities offer a guarantee that in the event of death the beneficiary will receive at least all the premiums paid less any withdrawals made no matter what the value of the account.
EQUITY INDEXED ANNUITIES
An Equity-Indexed Annuity (EIA) has interest rates that are linked to growth in the equity market as measured by an index such as the S&P 500. The EIA owner enjoys the upside potential of equities but is not exposed to downside risk. Subject to fixed minimum guarantees, the value of an EIA can only increase due to market growth – it will never decline due to market movement. There are many variations in product design. No two of the EIAs are exactly alike, and some are very different from each other. However, all the various types fall into three general categories: annual high-water mark with look-back. The following is a simple definition of each. Please call us if you would like to know more.
Annual Reset - Also known as the annual ratchet design, the annual reset design resets the starting index point annually. It also credits index increases (interest) annually and compounds annually.
Point-to-Point – The point-to-point design measures the change in the index from the start of the term to the end of the term.
Annual High-Water Mark with Look-Back – The annual high-water mark with look-back can be viewed as a variation on the point-to-point design, except that it measures the index from the start of the term to the highest anniversary value over the term.
* Some annuities allow the insurance company to change participation rates, cap rates or spread/asset/margin fees either annual or at the start of the next contract term. If an insurance company subsequently lowers the participation rate or cap rate or increases the fees, this could adversely affect an investor’s return. Therefore, a prospective investor must carefully review his or her contract in order to examine these issues.