1. Simple Annuity - We've already discussed
the simple annuity above. It basically has a stated interest rate,
there is a fee charge, and like CDs there are penalties for withdrawing
your money early. While all companies' simple or regular annuities
are basically the same in concept, they can be extremely different. Insurance companies can customize annuity products in many different
ways with different features.
A popular feature now is to provide
bonus interest in the first year or the annuity. Another common annuity
feature is to include different provisions for penalty free withdrawals.
So be aware that annuities can be quite different even though they
may have the same stated interest rate.
2. Indexed Annuity. An indexed annuity pays
interest based on how a stock index performs, like the S&P 500,
and does not have a stated interest rate. The purpose of this type
of annuity is to allow the investor to earn higher rates of interest
when the stock market is performing well.
This brings us to the question
of, "What happens to your earnings when the stock market goes
down?" You are probably thinking that you will lose money, however
you can invest in equity indexed annuities that do not credit losses
to your account. At this point, it would probably be a good idea to
explain in detail how an index annuity works.
About
Indexes
A
stock index is just a collection of stocks that are tracked
on a daily basis like the Dow Jones Industrial Average (DJIA)
or Standard and Poor's 500 (S&P 500).
Keep
in mind that when you invest in equity indexed annuities you
do not own any stock. Insurance companies own the stock or
index equivalents and pay you interest based on their earnings.
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3. Other Annuities. Unlike CDs, no two annuities
are the same. There are also other types and variations of annuities
not discussed in this article.
Remember that insurance companies issue annuities,
and insurance companies will customize their products to meet the
demands of their customers.
