Some days back, I happened to have a short online conversation with an old student of mine. He asked me about the annuity rates and the difference between fixed deferred annuities and variable deffered annuities. I was in a hurry so couldn’t explain him in detail and just gave outline. Today, I’ve 10 minutes so thought to write it down and post on blog, so that some others may also benefit from it.
Well, first to know what is the Deferred Annuity. It may work as banks’ certificates of deposit whereby the the buyer is offered a safe interest rate of return on their money, or to stock index funds or other stock funds, where the growth of the account is dependent upon the performance of the market.One thing common in all deferred annuities is that any increase in account values is not taxed until those gains are withdrawn. Better known as tax-deferred growth.
Now fixed Annuities offer some sort of guaranteed rate of return over the life of the contract, but may also be not completely fixed, instead a guaranteed minimum rate. This is the safest way, but the rate of return is of course not high. On the other hand, varianle annuities allow money to be invested in separate accounts, it’s very similar to mutual funds. Some variable concerns also allow a minimum guaranteed rate, bringing down the risk factor, but it’s still there with high rate of return.