There are three basic types of annuities, fixed, variable and indexed. Here is how they work:
- Fixed annuity. The insurance company guarantees you a minimum rate of interest (usually less than you could earn in the stock market or with mutual funds)and a fixed amount of periodic payments. Fixed annuities are regulated by state insurance commissioners. Please check with your state insurance commission about the risks and benefits of fixed annuities and to confirm that your insurance broker is registered to sell insurance in your state.
- Variable annuity. The insurance company allows you to choose your annuity payments to different investment options, usually mutual funds. Your payout will vary depending on how much you put in, the rate of return on your investments, and expenses. The SEC regulates variable annuities. Choose wisely, because you could receive a substantial payout — or lose the money entirely — depending on the investment option you select.
- Indexed annuity. This annuity combines features of securities and insurance products. The insurance company credits you with a return that is based on a stock market index, such as the Standard & Poor’s 500 Index. If your annuity performs well, your monthly payout in retirement could be higher. Indexed annuities are regulated by state insurance commissioners.
