The category, annuity is a very broad term that covers two different types of actual products. One is a security, the other is an insurance product. There are numerous differences, this article will explain the details.
There are two completely separate categories of annuities, their difference is like apples and oranges.
Variable Annuities: Variable annuities are securities sold by licensed security brokers.
A variable annuity contains three parts:
1. the actual contract
2. the investment accounts and
3. any additional riders attached to the annuity.
The actual variable annuity provides the contract provisions; they are available to read in the offering prospectus. The variable annuity charges a few for owning it; the fee is called the mortality and expense fee. Most M/E fees average about 1.45% of your overall account value per year.
The investments you select for your variable annuity is where your money is invested. These are called sub (or separate) accounts. Most variable annuities have between 10 and 50 possible choices. The funds you have placed in these sub accounts are also charged fees; each account is usually different from the other. Fees can range from .25% to as high as 2% percent of the funds invested in that account per year.
Your annuity may also have riders attached, such as a guaranteed death benefit, an income rider, and others. These riders perform specific benefits (if used) but also charge fees. These fees can be from .5% to as high as 2% per year.
Whatever you have selected for investments or riders, all the fees are added together, and your overall account is charged these fees annually.
The actual value of your account is determined by the performance of each investment choice minus the fees. Having gains and losses with variable annuities is possible.
Annual fees for variable annuities can reach as high as 4% (higher and lower) based on the product, and additional riders added to the contract.
If an income rider is selected to be used as future income, the variable annuity may offer 6% (or higher) as a guaranteed rate of interest credited to the account that determines the income valuation account. BUT, what is not guaranteed is the factor that determines the income, that will be determined based on the cost of money at that particular time.
Fixed Indexed Annuities always guarantee a fixed rate of return for the income account AND the rate which determines the actual income. These are contractual guarantees.
Fixed Indexed Annuities: Fixed Indexed Annuities are insurance products sold by licensed insurance agents.
A Fixed Indexed Annuity contains two parts:
1. the actual contract
2. any additional riders attached to the annuity.
The actual variable annuity provides the contract provisions; they are available to read in company brochures. The Fixed Indexed Annuity charges no fees and has no expenses.
Your money goes into the general investment account of the insurance company; you are charged no fee for investment management.
You can earn interest in 2 ways:
1. You may receive the annual declared interest rate offered by the company.
2. You can have your actual yield tied to an outside source such as the S/P 500. Whatever the S/P 500 earns is the gain added to your account. Most companies offer a cap (or limit). The limit is set annually based on market conditions.
Under no circumstances are your funds at risk, your principal is fully guaranteed and any interest earned is also added to the guaranteed side. As an example, if you made a deposit of $100,000 and it received 5% in a year, your new guaranteed account value would be $105,000. Your account would never go below that number (unless funds were removed)
Fixed Indexed Annuities may also have income riders. These riders are free but some companies add a bonus rider which contains a higher payout, and these can charge a fee. The decision for which rider to add is based on an individual’s situation.
Both annuity contracts contain surrender charges which means if you cancel the contract during this time period, you could be charged a fee.
In the event of death or by selecting a fixed income time period, surrender fees are canceled. In the event of death, the account value in full is paid to your named beneficiary.
Annuities should be used for long term planning, the best feature, in my opinion, is income, and an annuity will provide income for any time period, even as long as one or both of you live. The income is safe and secure.