Fixed Annuity: An insurance company agrees to periodic payments of a specific dollar amount, based on an interest rate. Example: You use $50,000 in cash to buy a fixed annuity. In return, the insurance company agrees to:
- Hold your money for 10 years, during which time you have to pay a penalty to access it (this 10-year period is known as a surrender period)
- Pay you a rate of interest on the money, say five percent.
- After 10 years, begin making payments to you of $500 per month.
- Make these payments to you for a certain number of years, or for as long as you live, depending on which option you bought.
Indexed Annuities: An insurance company guarantees a minimum rate of return on your money (say five percent), but also offers the possibility of additional earnings by linking the interest rate to a published index such as the Standard & Poors 500. Example: You use $50,000 in cash to buy an indexed annuity. In return, the insurance company agrees to:
- Hold your money for 10 years, during which time you have to pay a penalty to access it. This 10-year period is known as a surrender period.
- Pay you a rate of interest on the money, say five percent – or more, depending on the index used.
- After 10 years, begin making payments to you of $500 per month – or more, depending on the performance of the index.
- Make these payments to you for a certain number of years, or for as long as you live, depending on which option you bought.
Variable Annuities: An insurance company pays a rate of return on your money tied to the performance of investments in the stock market. Unlike fixed or indexed annuities, the amount of money you have in a variable annuity can lose money. For this reason variable annuities are regulated as insurance products by the Department of Insurance and also regulated as securities by the Missouri Secretary of State’s Office. Example: You use $50,000 in cash to buy a variable annuity. In return, the insurance company agrees to:
- Hold your money for 10 years, during which time you have to pay a penalty to access it. This 10-year period is known as a surrender period.
- Pay you a rate of interest on the money, based on the performance of the company’s investments in the stock market.
- After 10 years, begin making payments to you of $500 per month – or more or less, depending on the performance of company’s investments in the stock market.
