There are two basic types of deferred annuities – fixed annuities and variable annuities. There are several variations on them.
Fixed Annuities guarantee that your money will accumulate at a minimum specified rate of interest. However, the company will pay you a higher rate of interest if its investment experience is better than the minimum guarantee.
Variable Annuities differ from fixed annuities in that contract owners direct the distribution of their money among several different accounts and their accumulated funds reflect the experience of those accounts rather than that of the company. Typical account choices are: common stock, bond, mortgage or money-market accounts. If the value of the accounts increases or decreases, so will the amount accumulated.
Variable annuities are more risky to the contract owner than fixed annuities, but there is a possibility of greater returns.
Other types of deferred annuities combine the characteristics of fixed and variable annuities.
Annuities are sometimes sold as alternatives to investment vehicles such as certificates of deposit, money market accounts, mutual funds, etc. There may be differences. You should consult with your investment and/or tax advisor before making any decisions on purchasing this product.
If you die during the accumulation phase of a deferred annuity, an amount usually at least equal to the amount you have accumulated will be paid to your beneficiary. If you cancel the contract, or take some money out of it, there may be surrender charges deducted from the accumulation value. The amount you receive is usually referred to as the cash value. It is usually not a good idea to purchase a deferred annuity unless you are planning to keep it for more than just a few years.
