Index annuity vs fixed annuity
The former offers a fixed rate of return; the latter ties your rate to a market index to let you realize greater returns. Comparing the key differences between the two will help you determine which one might be suitable for your retirement saving strategy. A fixed annuity is a contract between a policyholder and an insurance company. In exchange for a lump sum or a series of payments, the insurance company provides a set amount of income starting at a future date.
Indexed annuities: Look before you leap
Why Zacks? Learn to Be a Better Investor. Forgot Password. Annuities are retirement savings contracts sold by life insurance companies. The three basic types of annuities are fixed, fixed index -- or equity index -- and variable. Both fixed and fixed index annuities provide a guaranteed minimum value of an annuity contract, but they credit earnings in different ways. The choice between the two types narrows down to what level of guarantee fits your financial outlook.
Annuities provide the advantage of tax-deferred growth on savings outside of qualified retirement plans such as individual retirement arrangements and k accounts. An individual saving for retirement can invest any amount in an annuity and have that money grow until it is needed to provide retirement income.
In retirement a deferred annuity can be "annuitized" to provide a lifetime monthly income. Fixed and fixed index annuities provide retirement savings growth, with fixed annuities earning interest at a rate set by the insurance company and fixed indexed annuities earning returns based on the stock market.
As a rough comparison, a fixed annuity is similar to a bank certificate of deposit. When you buy a fixed annuity, the insurance company will guarantee a certain interest rate for a set period, often five years or longer.
Once the rate guarantee runs out, the insurance company will continue to pay interest on the annuity based on what the company is earning on its investments. A fixed annuity will have a declining surrender charge schedule for five to seven years after the purchase date. A surrender charge is a percentage of the annuity value kept by the insurance company if the annuity is closed during the surrender charge period. These rate and surrender charge periods are typical, but fixed annuities are available with a wide range of rate and surrender charge combinations.
The major feature of an indexed annuity is how the earnings for one of these annuities is determined. The earnings of an indexed annuity are based on the value change of a stock market index. If the stock index goes down, an index annuity will pay a guaranteed minimum rate of zero to 2 percent. Because the maximum earnings may be capped, an index annuity will earn only up to the capped percentage even if the stock market has a great year.
The surrender charge period for indexed annuities is usually much longer than for fixed annuities -- often 12 to 15 years or longer. A fixed annuity provides the advantage of a guaranteed rate of interest, at least for the initial guarantee period.
An annuity can be exchanged for another annuity without tax consequences. Consider an exchange if the rate on a fixed annuity is too low after the initial rate or surrender charge period runs out. A new surrender charge period would apply. Fixed equity-indexed annuities combine a guaranteed minimum return plus the potential of higher earnings if the stock market does well. The trade-offs are the much longer surrender charge period and the complicated earnings formulas used by most index annuity providers.
Most annuities allow limited, penalty free withdrawals during the surrender fee period. Check this feature if you think you may need some money from your new annuity. Tim Plaehn has been writing financial, investment and trading articles and blogs since His work has appeared online at Seeking Alpha, Marketwatch.
Plaehn has a bachelor's degree in mathematics from the U. Air Force Academy. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. These returns cover a period from and were examined and attested by Baker Tilly, an independent accounting firm. Visit performance for information about the performance numbers displayed above.
Skip to main content. CD Vs. How do I Calculate Retirement Annuities? Purpose of Annuities Annuities provide the advantage of tax-deferred growth on savings outside of qualified retirement plans such as individual retirement arrangements and k accounts.
Fixed Annuity Features As a rough comparison, a fixed annuity is similar to a bank certificate of deposit. Indexed Annuity Features The major feature of an indexed annuity is how the earnings for one of these annuities is determined. Annuity Considerations A fixed annuity provides the advantage of a guaranteed rate of interest, at least for the initial guarantee period.
Video of the Day. About the Author. Photo Credits.
Keep in mind, fixed indexed annuities are complex since they combine characteristics of a fixed annuity and a variable annuity. A fixed annuity. A fixed indexed annuity offers a guaranteed interest rate as well as additional returns if the stock market performs well. However, the tradeoff is.
Annuities once came in two basic varieties. On one side were fixed annuities that provided the owner with modest returns but the security of guaranteed payments. The alternative was a variable type, whose return was based on how well a particular basket of stocks performed. In more recent years, however, annuity customers have had a third, middle-of-the-road option, indexed annuities. Indexed annuities feature a guaranteed return plus a market-based return.
The general appeal of equity-indexed annuities is to moderately conservative investors who like having some opportunity to earn a higher investment return than what's available from traditional fixed-rate annuities, while still having some protection against downside risk. But they are complex and have some disadvantages to keep in mind if you are considering purchasing one.
The former offers a fixed rate of return; the latter ties your rate to a market index to let you realize greater returns. Comparing the key differences between the two will help you determine which one might be suitable for your retirement saving strategy. What is a Fixed Annuity?
A Beginner's Tutorial for Fixed Index Annuities
Apply Now or recommend to someone you know! When investors hold investment accounts subject to an ongoing AUM fee, they can clearly see the expense being subtracted from the account on each statement. Similarly, variable annuities have an explicitly disclosed expense ratio that is subtracted from the account balance on an ongoing basis. Michael Kitces is Head of Planning Strategy at Buckingham Wealth Partners , a turnkey wealth management services provider supporting thousands of independent financial advisors. When a premium contribution is made to fixed annuity, the funds are normally invested by the insurance company as part of its General Account , which typically holds a wide range of bond investments, matched to the anticipated liabilities of the insurance company e.
Member Sign In
A Fixed Index Annuity is a tax-favored accumulation product issued by an insurance company. It shares features with fixed deferred interest rate annuities ; however, with an index annuity, the annual growth is bench-marked to a stock market index e. In simplest terms, the insurance company bears the risk of a sharp stock market decline with this type of annuity. Many fixed index annuities also offer premium bonuses, but usually at the expense of lower potential gains. One advantage that a fixed index annuity has over a mutual fund or a bank Certificate of Deposit CD is that earnings grow on a tax-deferred basis. This means you pay no income taxes until you withdraw money from the annuity. Index annuities can also be purchased using rollover funds , funds transferred from a tax-qualified plan i. IRA , or with a lump sum distribution from a k or pension plan.
These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.
Annuities, a financial product offered by insurance companies, can provide you with an income stream that you can't outlive. The only challenge is wading through the various annuity types and figuring out which one is best for you. An indexed annuity is one popular option, but you should review the terms carefully before buying one.
Equity-Indexed Annuity
Why Zacks? Learn to Be a Better Investor. Forgot Password. Annuities are retirement savings contracts sold by life insurance companies. The three basic types of annuities are fixed, fixed index -- or equity index -- and variable. Both fixed and fixed index annuities provide a guaranteed minimum value of an annuity contract, but they credit earnings in different ways. The choice between the two types narrows down to what level of guarantee fits your financial outlook. Annuities provide the advantage of tax-deferred growth on savings outside of qualified retirement plans such as individual retirement arrangements and k accounts. An individual saving for retirement can invest any amount in an annuity and have that money grow until it is needed to provide retirement income. In retirement a deferred annuity can be "annuitized" to provide a lifetime monthly income. Fixed and fixed index annuities provide retirement savings growth, with fixed annuities earning interest at a rate set by the insurance company and fixed indexed annuities earning returns based on the stock market.
Fixed vs. Fixed Indexed Annuities: What’s the Difference?
Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an email. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity.
