Investing Unit 5: Annuities

• Introduction
• Unit 1: Basic Building Blocks of Successful Financial Management
• Unit 2: Investing Basics
• Unit 3: Finding Money to Invest
• Unit 4: Ownership Investments
• Unit 5: Fixed-Income Investing

• Certificates of Deposit
• Series EE and I U.S. Savings Bonds
• Money Market Mutual Funds
• Bonds
• Unit Investment Trusts
• Bond Mutual Funds
• Mortgage-Backed Securities
• Annuities
• Preferred Stock
• Guaranteed Investment Contracts
• Five Tips for Fixed-Income Investors
• Summary
• Action Steps
• About the Author

• Unit 6: Mutual Fund Investing
• Unit 7: Tax-Deferred Investments
• Unit 8: Investing Small Dollar Amounts
• Unit 9: Getting Help: Investing Resources
• Unit 10: Selecting Financial Professionals
• Unit 11: Investment Fraud

• Study Guide
• Action Steps
• Monthly Investment Messages
• Glossary

An annuity is a contract with an insurance company to provide regular income immediately or at some time in the future for a specified period (e.g., the lifetime of an annuitant or an annuitant and his/her spouse), typically during retirement years. In return, an investor deposits a sum of money with an insurance company, which grows tax-deferred until withdrawal, or makes periodic payments.

There are two types of annuities: variable annuities which provide access to growth-oriented (ownership) and income-oriented (loanership) investments through a choice of mutual fund subaccounts, and fixed annuities that guarantee a fixed rate of return for a specified period of time. Thus, fixed annuities are like a CD, but are tax-deferred. A rate of return is locked in for a period of 1 to 5 years after purchase and then adjusted annually according to market conditions.

Equity indexed annuities are a type of fixed annuity sold by insurance companies that offer both a guarantee of safety of principal and an opportunity to benefit from rising stock prices. In reality, the interest paid is generally only a percentage of a market index’s gain (e.g., the Standard & Poor’s 500 index). The actual rate of return varies according to how the issuer credits interest and/or caps the maximum allowable return. Generally, the dividend return of a market index is not included and the minimum guaranteed rate is 3%. These annuities typically require a $5,000 minimum investment and charge surrender fees if an investor withdraws funds within a specified number of years after purchase.

Annuities generally require a $5,000 minimum investment. Annuity investors should compare surrender charges (a fee assessed for cashing out early), rates of return, and the financial health of insurance companies that offer annuities. Be sure to check with rating services such as A.M. Best, Moody’s, and Duff and Phelps and stick with top-rated insurance companies.