Fixed Annuity: A fixed annuity may be suitable for individuals seeking a safe investment that promises to make consistent and dependable payments for the remainder of the investor’s life. It promises a guaranteed rate of minimum return to an investor. This typically is offered after the investor submits a large, lump sum payment into the annuity contract. It can also be provided if the investor chooses to make several periodic payments as well. Purchase payments contributed to the contract are allocated to the insurance company’s general account. The general account is what allows for the minimum, guaranteed rate of return. The general account holds safe investments which allow the insurance company to offer such guarantee. 

These payments are backed by the faith and credit of the insurance company’s claims paying ability. A.M. Best and Standard & Poor’s are rating companies which vet insurance companies and provide a score which indicates the financial credibility of the issuing company. The insurance company bears the investment risk, so deciding which insurance company to choose from can be a vital part of the decision when purchasing an annuity. 

Although the fixed annuity offers assurance that the minimums will be paid, it tends not to offer a high rate of return. As safety and security take precedence over risk and reward, higher returns are not as common.

Indexed Annuity: An equity indexed annuity, or indexed annuity is a unique type of fixed annuity account. The performance of the annuity is based on the underlying index, such as the S&P 500. Tracking an index is beneficial to the investor because it offers lots of diversity in spanning several different stocks. Another strong advantage to an indexed annuity is the investor’s guaranteed rate of return, despite the performance of the underlying index decrease. Meaning, the annuity contract’s guaranteed rate may continue to rise, even if the index it tracks falls. For this reason, an indexed annuity is still considered a fixed annuity. The advantage to an indexed annuity is that when the underlying index does increase, or has a positive year, the index will boast greater returns than the guaranteed minimum. 

An important piece to take into account is the participation rate of the annuity. The participation rate means how much, or what portion of the annuity’s value will rise when the index goes up. For example, if the annuity has a 70% participation rate, then 70% of the index’s total increase in value would be credited to the annuity. Also, the dividends of the annuity are important to consider. Most annuities will have a cap, or maximum amount that an annuity contract will allow an investor to receive, in proportion to the increase, or upswing in the underlying index. For example, if the S&P 500 had a great year, and rose 18%, there may be a cap, or maximum amount that can be credited, to say, 7%. Keep in mind that the floor is an advantage that protects against drops, though. So, be aware of the trade-off. Another advantage is that annuities can and do receive dividends from companies that choose to pay dividends. However, the returns on an indexed annuity do not factor in the dividends earned.

Variable Annuities: Variable annuities can involve more risk than a fixed annuity. Variable annuities do not offer a fixed return. Instead, they allow the investor to potentially boast greater returns, but sacrifices the safety and security of the fixed, guaranteed return. This is because the variable annuity is invested in stock and bond markets. Variable annuities do not have a cap on returns, and thus, the participation rate is irrelevant. Conversely, when the underlying investments decrease in value, the annuitant of the variable annuity will suffer the loss, or drop to a floor of 0. Investors of a variable annuity are contributing to the insurance company’s “separate account” rather than their general account. Returns of this sub account will be factored into the actual performance of the variable annuity.