An annuity is a contract with an insurance company to make periodic payments for retirement income and sometimes other purposes. There are basically two types of annuities.
Fixed Annuities
A fixed annuity earns a guaranteed interest rate over a specific period of time. When this period of time expires a new interest rate is set for
next period of time. Is important to note that a fixed annuity is not backed by Federal Deposit Insurance Corporation (FDIC).
Variable Annuities
Variable annuities offer a much greater range of investment funding options than fixed annuities. Because their performance depends on investment options your principal and return are not guaranteed. Some variable annuities offer a fixed accounts alternative that guarantees principal and interest a lot like fixed annuities. You can then divide your funds between low-risk option as well as high-risk options such as stocks.
Purchasing Annuities
There are two ways to purchase annuities. You can either pay premium using one lump sum or you can make ongoing contributions to what is called a flexible payment annuity. With a flexible payment annuity you can contribute money pretty much any time you want. Another benefit of variable annuities is that they allow you to transfer money from one account to other without having to pay taxes on any earnings you make as a result of transfer. The disadvantage of variable annuities is that you will most likely pay higher fees than you would with a fixed annuity.
