ARE ANNUITIES SAFE?
To answer the question, “Are annuities safe?” we should first explore what an annuity is. An annuity means you place money into an account with an insurance company. That money then grows for a period of time. After that initial waiting period, the annuity begins a series of fixed payments. In fact, these are usually lifetime payments.
Certain types of annuities are safe, while others carry the same risks as a stock market investment would. Variable annuities, for example, invest directly in the stock market. Therefore, at any point, you could lose your principal if the market goes down. However, fixed annuities and fixed index annuities (FIAs) differ. With these types of annuities, your principal is guaranteed secure by the issuing annuity insurance company. Regardless of the market fluctuations, your money is safe from market loss inside an FIA.
HOW DOES AN ANNUITY WORK?
Both fixed annuities and fixed index annuities (FIA) offer protection of principal as well as a potential rate of return. The difference, however, is that an FIA also offers indexed interest potential. This means that when its related index goes up, you can capture some of that growth. However, if your annuity’s index goes down, you don’t lose your money. On the other hand, a fixed annuity offer a set interest rate, regardless of market conditions. Because it is fixed, the rate is typically lower than what FIA owner’s may receive during an index interest increase.
THE TIMELINES OF AN ANNUITY
There are two timelines associated with an annuity. The first is the time where the money is allowed to grow. This is the accumulation phase. During this time period, you do not take payments or income. Instead, the money grows for a certain number of years. Next, is the distribution phase. As you might have guessed, this is when you can begin taking money out of your annuity. You can do this in the form of lifetime income payments, annual payments, or some other combination. Of course, the details of how you take money out depends upon the specific terms of your annuity.