We’re going to make this real simple because annuities can be messy investments. Yes, they have income riders, surrender fees, and contractual guarantees. Yes, they can lose your money, cost a lot, and lock you out of your account. But they can also guarantee your principal, grow your money without market risk, and pay out regular income.
The trick is to choose the right one that satisfies you.
Three kinds of annuities: Think ice cream.
The easiest way to understand the basic three types is to think about them in terms of ice cream: vanilla, chocolate, and twist.
Fixed annuities are your basic plain vanilla annuity. They give you a minimum guaranteed interest rate, and they guarantee that the money you put into the investment will be there when you want to take it out, minus any withdrawals or surrender fees. The downside is that, well, things can get a little boring with today’s low-interest rates on guaranteed products.
So how about some chocolate . . . yeah, chocolate always sounds good, until you get a stomach ache. Variable annuities can be considered the chocolate of the annuity world because they can be made to sound exciting. They are sometimes called hybrid annuities because they invest your money in the stock market AND they structure it for income. They can lose your money and are one of the most expensive investments you can own.
So what’s the twist?
Today’s newer fixed indexed annuities can be described as the chocolate vanilla swirl because they give you the best features of both flavors, combined in one confection. In fact, confusing enough, these annuities are also sometimes referred to as hybrid because they also give you two things.
The vanilla part gives you principal guarantees. Fixed indexed annuities have a fixed element to them, so the worse you can ever do is earn zero percent. You can’t go back due to stock market loss.
The chocolate part of the investment earns you market-linked gains. This is where the word “index” comes into play. Indexed annuities are linked to a market index of your choice, and there are several different methods used to credit the interest.
This can make indexed annuities a little difficult to figure out, but having a conversation with a knowledgeable financial professional can help make sure you get the one that can best satisfy your income appetite.
So, to sum up, indexed annuities give you the potential for more risk, but with more return than a fixed annuity. They also have less risk and less potential return than a variable annuity. You can also add extras such as income riders and death benefits that kind of work like sprinkles and whip cream to further sweeten the deal.