What
is a Deferred Annuity?
With a deferred annuity you pay a premium to the insurance company which
issues a contract promising to pay interest or gains made on the deposit
while deferring the income and the taxes until you actually withdraw the
money or begin receiving an income.
What's the advantage
of a Deferred Annuity?
One of the primary advantages of deferred annuities is the opportunity
to accumulate a substantial sum of money by allowing your premium and
interest to grow tax-deferred. Unlike taxable investments, you pay no
taxes on your annuity interest until you begin to take withdrawls or receive
income. This allows your money to grow faster than in a taxable account,
because you earn interest on the money that would have otherwise been
paid in taxes.
What are Equity-Indexed
Annuities?
It is a fixed annuity, either immediate or deferred, that earns interest
or provides benefits that are linked to an external equity reference or
an equity index. The value of the index might be tied to a stock or other
equity index. One of the most commonly used indices is Standard &
Poor's 500 Composite Stock Price Index, which is an equity index. The
value of any index varies from day to day and is not predictable.
When you buy an equity-indexed
annuity, you own an insurance contract. You are not buying shares of any
stock or index.
How Are They
Different From Other Fixed Annuities?
It is different from other fixed annuities because of the way it credits
interest to your annuity's value. Some fixed annuities only credit interest
calculated at a rate set in the contract. Other fixed annuities also credit
interest at rates set from time to time by the insurance company. Equity-indexed
annuities credit interest using a formula based on change in the index
to which the annuity is linked. The formula decides how the additional
interest, if any, is calculated and credited. How much additional interest
you get and when you get it depends on the features of your particular
annuity.
The annuity, like
other fixed annuities, also promises to pay a minimum interest rate. The
rate that will be applied will not be less than this minimum guaranteed
rate even if the index-linked interest rate is lower. The value of your
annuity also will not drop below a guaranteed minimum.
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