Annuities are contracts between an individual and a financial service provider or insurance company. The way it works is you invest money in an insurance product or policy type and in return you receive a return, sometimes fixed and sometimes dependent on “the market”. You can also receive regular income over an agreed-upon period.
Annuity Rates Are All Different
The percentage by which annuities grow each year is the “annuity rate.” These rates can fluctuate based on the contract (the purchase). This fluctuation can be mitigated by either limiting the period of time in which you are paid (called the term) or by the performance of the stock market index you are tied to. These two methods are what make up the two most common types of annuities; Fixed Annuities and Index Annuities. If you wish to invest in annuities, it is best to know the difference between the two most common annuity types as one is likely to suit your financial profile better than the other.
Fixed Annuities and Index Annuities
In a fixed annuity, will pay a guaranteed rate of return for the term of the contract. This is called the fixed-rate and is written into the contact with the insurance carrier. It is VERY important you read the fine print as there are fixed annuities with “trust me rates” and or variable rates of return. Be very careful. The money in the annuity grows at a fixed rate of return, a lot like a CD (Certificate of Deposit) but instead of being backed by the FDIC, annuities are backed by the insurance carrier. What is great about fixed annuities as they usually pay more than C.D.’s. You can also (depending on the contract) access part of your money or clip a coupon (like a bond). One thing to note, these do not go down in value.
These, also known as a “Fixed Index Annuity,” are the same in most regards. These contracts do not go down and instead of having a declared or fixed rate or return, your return is mirrored from the “Index”. This index could be the S&P 500 or the Dow Jones, there are a lot of options. It should be noted that your returns are not “fixed” or guaranteed as they are dependent on the “index” or market returns.
Indexed annuity advantages
Here are some things to know as you consider a fixed-indexed annuity:
- Protection from loss: With a fixed-indexed annuity, your annuity won’t lose value, regardless of index performance, unless you withdraw money or surrender your annuity during the early withdrawal period.
- Locked-in earnings: Your indexed interest is credited to your fixed-indexed annuity at the end of each term. Any interest credited to your fixed-indexed annuity is locked in and protected from future market declines.
- Tax deferral: You don’t pay taxes on the interest your fixed-indexed annuity earns until you start receiving payments or take a withdrawal, so your fixed-indexed annuity may grow at a faster rate.
- Guaranteed retirement income: When you’re ready to turn your fixed-indexed annuity into retirement income, you can select from a variety of payout options, including an income stream that will last for the rest of your life.
- Additional benefits with an optional rider: Many of our fixed-indexed annuities offer optional riders that can provide guaranteed income for life or additional death benefit options for your beneficiaries. There are annual charges for these riders.
A fixed-indexed annuity may be the right choice to protect your principal while potentially earning higher interest rates than those of other financial products.
How Are Annuities Taxed?
The returns from annuities grow tax-deferred. This means that as they grow in value you are not paying any tax on that money. Once you go liquidate or withdrawal money you are taxed on the LIFO method. Meaning, you withdrawal any profits first and pay taxes on these monies first before getting back your principal/original investment amount. To learn more about these important financial topics, get in touch with Tennessee Annuity Rates. We can help you navigate the annuity market and confirm the best options for your individual needs. Schedule your free consultation today!