Let’s discuss the two major types of Retirement Annuities and some of their variations.
A variable annuity puts some or all of its cash value in the stock and/or bond market. The owner of the annuity assumes the risk of market fluctuations and it is possible for the markets to go up and make a great return or to plunge and lose some of the cash value. Annuity Coaches Network does not offer variable annuities because of their market risk. The internet has a wide variety of information sources on variable annuities. We encourage interested consumer to search on ‘variable annuity’ if they want to learn more about these products.
In a fixed annuity the insurance controls where the cash value is invested and guarantees to protect the policyholder from market losses. Except for the MVA clause (see “Important Retirement Annuity Fine Print” coming soon!), the owner of a fixed annuity is completely shielded from any possibility of losses arising from the change in price of any market security, including bonds held by the carrier for the purpose of crediting interest to the policy cash accounts. The most common investments that fixed annuity carriers select are investment grade commercial bonds. The carriers use the interest on their bond holding to pay their costs and then pass on the excess to the annuity accounts as compounding interest. Since commercial bonds are the financial backing for fixed annuities, it is impossible for fixed-interest annuities to pay a higher yield than commercial bonds over an extended period of time. Beware of anyone claiming that their fixed-interest annuity products have interest rates higher than commercial bond yields.
Fixed Indexed Annuities
Equity indexed annuities are an interesting variation of fixed-interest annuities and they tie annuity earnings to a stock market index. In an equity indexed annuity the insurance carrier purchases the same types of commercial bonds, but instead of crediting the interest to the annuity cash value, they instead purchase a stock market hedge on a specified stock market index. If the index goes up, some or all of the growth is credited to the annuity account. If the market moves sideways or down the hedge expires and the amount paid for it is lost.
Some policies pay a guaranteed minimum interest when the hedge fails to make a profit, but in others there is simply no growth for that period. Equity indexed annuities are far more complex than this brief discussion and offer annuity buyers the change to increase their long term returns. Please see “Equity Indexed Annuities Explained” for a more detailed exploration of these unique and versatile products.
Guaranteed Lifetime Withdrawal Benefit Riders
Guaranteed Lifetime Withdrawal Benefit riders have become popular over the last few years. A GLWB is a guarantee from the carrier that an account will earn or grow in a specified manner and then be paid out at a stated rate. The unique feature is that these accounts do not have a cash value. The carrier is simply promising an income stream while the annuitant lives. Because the rights of the annuity owner are limited, the carrier can offer a higher return and therefore a higher retirement income from these accounts, than might otherwise be available from their more traditional annuity options. GLWB’s are most often sold in tandem with an equity indexed annuity. By adding a GLWB rider to an equity indexed annuity the company is combining a market driven earnings product with a back-up guarantee. For additional information see What is a Guaranteed Lifetime Withdrawal Benefit Rider?.
A fixed-indexed annuity with a guaranteed lifetime withdrawal benefit rider is commonly called a Hybrid annuity. It gives the retiree the advantage of long term indexed growth and the additional guarantee of income they cannot out live from an account value (for income purposes only) that is always higher than the policy cash value. However, it is important to understand that a great many GLWB accounts charge a small annual fee against the cash value. This can significantly reduce the growth of your cash value account. (See What is a Hybrid Annuity).
Please work with an expert at matching your individual financial and retirement planning needs to the most appropriate annuity.
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