Index Annuity Types: Know The Ways To Save Your Hard-Earned Money
Having a solid understanding of index annuity types can help you save your money in the way that works best for you.
Index annuities are sometimes called hybrid annuities. They combine the potentially greater returns of variable annuities but don't come with the same risk of losses, even if it means you get nothing that year because the stock market is down. However, there are several index annuity types. Know the ways to save your hard-earned money and balance risk with higher returns.
Any annuity can be immediate. An immediate annuity begins making payments immediately, as soon as you’ve signed the contract and funded it. The challenge for insurance companies is balancing income with outgo. They don't want to pay out more money than you’ve paid in, even after they’ve earned interest on the principal balance. This is why you will get more money if you wait until you’re older to sign up for an immediate annuity. You could choose to draw down your nest egg before you lock most of it up in an annuity.
But why are immediate annuities so attractive? You sign up, and you’re done. The fees are built into the payout and you start getting your checks immediately. Note that this may be monthly, quarterly, or annually. You’ll get the money for the rest of your life. You can add a rider or structure the annuity so that the payments continue for your spouse after your death. Regardless of your physical or mental health, it will continue to generate income. You eliminate the need to manage the investments, though you’ll still get higher returns than the stated fixed annuity rates.
Deferred annuities are simply annuities where you are deferring or delaying the day you begin collecting. You could invest a single lump sum from an insurance settlement, cashed-out pension, or 401K rollover. You can choose the growth type you want. In this case, we’re talking about index annuities.
The benefit of deferred annuities is that the money has time to grow. You can try to find a new job or simply draw down savings before you activate the annuity. With an index annuity, the money will grow faster than if it were in a fixed rate annuity. And the growth is tax-deferred. In most cases, you could contribute to the annuity as well. There is no contribution limit to an annuity, and there is no limit regarding how much you can take out.
How Are These Types Of Annuities Similar?
Whether you start receiving payments immediately or defer them, index annuities are tied to a given index or group of indices. You can choose which index you want the account to follow, or you can divide it across several indexes. You can even have a set “participation amount”. For example, you could have 70% of the money in an indexed annuity and 30% in a fixed rate annuity. This gives you a balanced approach, and the “non-participating” principal will generate guaranteed returns.
Index annuities come with fees just like other annuities, and you’ll pay surrender charges if you take the money out ahead of the distribution schedule. Indexed annuities will give you some protection against a declining stock market, and you’ll pay for it in the form of lower returns. But, like all annuities, someone else is managing the money on your behalf. However, the rate caps and yield caps will vary, so shop around.
You will pay more for riders on your annuity, just as you would pay more for riders on your life insurance or homeowner’s insurance. One of the most popular annuity riders is the guaranteed withdrawal benefit rider. This rider lets you access part of the money without the surrender penalty. Death benefit riders will provide a death benefit to your heirs. This benefit guarantees they’ll get at least some of the money that you would have received, although you should note that this money is lost to your family if you die halfway into the contract. Lifetime income benefit riders will ensure that you continue to receive income even if the annuity is depleted.