ANNUITIES

Confused about annuities? You're not alone. Many people have difficulty understanding them. The main reason for all the confusion is that annuities may be single or flexible-payment, fixed or variable, deferred or immediate.

No matter the type, annuities are financial contracts with an insurance company that are designed to be a source of retirement income. This section will help you decide if an annuity is right for you and help you to choose the type of annuity that best meets your needs.

Single vs. Flexible-Payment Annuities

You can purchase an annuity in two ways:

• Make one lump-sum payment to purchase a single-premium annuity. If you want to contribute more money at a later date, you will have to purchase another annuity.
• Make ongoing contributions to a flexible-payment annuity. You can contribute money at regular or even irregular intervals anytime you want.

Fixed vs. Variable Annuities

There are two basic types of annuities you can buy -- fixed and variable.

• Fixed Annuities - Fixed annuities earn a guaranteed rate of interest for a specific time period, such as one, three or five years. Once the guarantee period is over, a new interest rate is set for the next period. This guarantee of both interest and principal makes fixed annuities somewhat similar to Certificates of Deposit (CDs) purchased from a bank. Unlike a typical CD, however, an annuity is not backed by the Federal Deposit Insurance Corporation (FDIC); its security is directly related to the financial health of the insurance company that issues the annuity.
• Variable Annuities - Variable annuities typically offer a range of investment or funding options. These funding options may include stocks, bonds and money market instruments. The return on variable annuities can go up or down. Your principal and the return you earn are not guaranteed; they depend on the performance of the underlying investment options. If the funding options you choose for your annuity perform well, they may exceed the inflation rate or fixed annuity returns. If they don't, you may lose not only prior earnings, but even some of your principal.

Some variable annuities offer, in addition to a range of investment options, a fixed account option that guarantees both principal and interest, much like a fixed annuity. This gives you the option of dividing your money between the low-risk fixed option and higher-risk vehicles such as stocks, all under the umbrella of just one annuity. Many variable annuities offer asset allocation programs to help you decide where to invest your assets based on your circumstances.

Variable annuities also allow you to transfer money from one account to another without triggering a taxable event. In other words, if you transfer money to a different funding option within your variable annuity, you will not have to pay taxes on any earnings you have made. Tax-free switching lets you re-allocate money to suit changing market conditions, without worrying about the taxes.