Fixed Annuities VS. Variable Annuities:
Although all annuities share the same general goal of providing safe long-term investment, there are different types of annuities. You may buy the fixed annuities and the variable annuities. Both have different characteristics. Fixed annuities are usually less risky as they mostly stay in the financial institutions account and are used to buy bonds. On the other hand in a variable annuity, there is a greater risk as the money is used in other financial tools.
Fixed annuities have a fixed interest rate that is locked in for first year. The interest rate can vary after the first year but there is a minimum guarantee. One may count on a reliable return on their investment. It is also promised by fixed annuities that the person does not lose his principal unless something like the insurance company getting bankrupts happens.
In case you prefer, the fixed annuities give you an option to get a big lump sum. You can also take it out in a set of periodic payments which is already determent, until the account of annuity becomes empty. Finally, you can also opt to annuitize payments. It provides you with the choice of receiving the monthly payments for a specific time period, which may be set to rest of your life or life of spouse. This option allows you to keep receiving payouts even after you have surpassed the amount of money which you invested and return on that investment. The risk is minimized in this option compared to others.
Risks in Fixed Annuities:
- One still faces the risk of the provider of annuity failing and there is no guarantee by any of the federal organizations.
- In case the fixed rate which is guaranteed to you is lower than rate of inflation, you can lose out on spending power.
- In some cases, if the owner of policy dies after receiving only a small number of payments, the company which is providing annuity will not have to pay to surviving spouse.
In case of a variable annuity, there is no guaranteed interest rate and they can change. In addition, more risk is involved in a variable annuity as the money which you pay can be put in different subaccounts. The level of risk which you want to take is determined by you and the performance of your investment is going to be very important for your financial well-being.
Within a variable annuity, you will receive a tax-deferred growth. One may invest as much as he likes in any year and still get the tax deferred status. In contrast, an IRA or a Roth IRA has an annual contribution limit.
As the money in the variable account is connected to different types of financial products, there is substantially higher level of risk. Having said that, there are some protections which can be used in case the owner of policy suffers loses on investments or lives for a longer period of time than expected. This gives some additional security and insurance over a basic variable security.