Fixed and Variable Annuity Terms
Fixed and variable annuities, issued by insurance companies, also can be an important part of your wealth accumulation or financial planning process. Annuities protect you against the possibility of outliving your financial resources. Annuities are contracts between an insurance company and an individual. Typically the individual contributes funds to the annuity, whose earnings grow tax-deferred. At a future date, the contract may be "annuitized", which means that the accumulated funds will be paid out periodically. Alternatively the funds may be withdrawn in lump sums, enabling holders to control their taxable income. With a fixed annuity, the issuing life insurance company guarantees a certain interest rate for a set period of time, typically 1-10 years. This guarantee can be useful for very conservative, risk-averse individuals. The insurance company bears the risk. If you annuitize, the annuity payments are fixed and guaranteed.
A variable annuity allows the investor to direct how the funds will be invested. This type of annuity has "sub-accounts" with various mutual fund companies. These "sub-accounts" allow the investor to allocate assets between a variety of stock, bond and money market investments. The investment risk in this type of annuity rests with the contract owner (the investor) and if annuitized, the annuity payments depend on the performance of the sub-accounts.