Annuities provide solid alternatives for investors

Info from jacksonsun

The unstable stock market and lost home values have caused people to look for alternative investments that can provide steady incomes.One of those investments being considered is annuities, which can pay the owner a constant monthly income, depending on the type of annuity purchased.

In today's violent market annuities are a good alternative.

Annuities are issued by insurance companies.

Annuities can be bought for various amounts, for example $5,000 to $5 million or higher. They can be purchased in two ways:

By paying the entire purchase price, including all principle, fees, and other charges, if any, in one lump sum.

Or paying a specific amount over a period of time.

The three most common annuities are: Fixed, Variable or Fixed Indexed.

All three products can provide a life time income that cannot be outlived.

Fixed

This annuity pays the owner the same amount of income or interest rate each month regardless of what happens in the stock, bond, commodities or other markets. For instance, if a person pays $50,000 for a fixed annuity that pays $1,500 a year, the owner will receive that amount each year until the end of the annuity's contract. The payments can last as little as 10 years, the payments can continue until the annuity owner's death or afterward to specified heirs. This is true with most other annuities as well.

Fixed Indexed annuity

These are the middle men of the annuity market, said Kaid Bowen of Insurance Network America. Bowen's company does not sell annuities; rather, the organization teaches insurance agents about annuities and how they work. A Fixed Indexed annuity does not pay a fixed amount each year, but it never loses money.

The rate of return on a Fixed Index annuity is determined by one of the financial indexes, say the S&P 500. If the S&P goes up, the rate of return goes up. If it falls, the rate of return falls.

These annuities have two features that variable annuities don't provide.

The first is that the owner of the annuity never loses money. If the financial index that moves the annuity's value, like the S&P 500, falls by 30 percent — which the S&P has done this past year — the annuity's rate-of-return never falls below zero. So, while the annuity's owner would not make money when the index falls, they would not lose money either.

But the other feature of a Fixed Index annuity limits future earnings, Bowen said. These annuities have an "earnings cap," so no matter how high the market index that affects the annuity rises in one year, the annuity holder only earns a limited amount, say 7 percent.

If the S&P 500 rises 6 percent in one year, you earn the entire 6 percent,but if it goes up 40 percent in one year, you can only earn a total of 7 percent that year.

This is an example of how a Fixed Indexed annuity works. Some of these annuities allow the owner to capture a larger return.

The third type of annuity is a Variable Annuity. These Annuities gain and lose value and do not pay the same rate of return each year. The money put into a variable annuity is invested in mutual funds, bonds or stocks. If those instruments lose money, the annuity loses money. If they gain, the annuity gains. Therefore, buyers of variable rate annuities need to look for a Guaranteed Minimum Payout Rate on that annuity. The rate is an amount which the annuity's value or its pay out rate will not fall below no matter how far the value of the underlying mutual funds or stocks fall. This guarantee comes with a fee, however, and is available on other annuities also.

On the good side, variable rate annuities have unlimited upside potential. If the value of the underlying stocks or mutual funds double, so does the value of the annuity. The death benefit on a variable annuity is a little different. These annuities usually pay the greater amount of either all the money in the account or a guaranteed minimum.

Annuities may be good for those people who need a guaranteed annual income.

All annuities have a "Surrender Charge," which is basically an early withdrawal fee. Surrender charges can be in effect for as long as 20 years, and the penalty for early withdrawal can be up to 10 percent. So one should not put all their money into annuities because of possible future financial emergencies.

If you are a risk averse investor who is just looking to hold on to what you have then annuities might be right for you, if on the other hand you are looking to make a significant profit on your investments over time, then you should definitely look elsewhere.

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