An annuity is a contract between you and an insurance company,
under which you make a lump-sum payment or series of payments.
In return, the insurer agrees to make periodic payments to you
beginning immediately or at some future date. Annuities typically
offer tax-deferred growth of earnings and may include a death
benefit that will pay your beneficiary a guaranteed minimum amount,
such as your total purchase payments.
There are generally two types of annuities—fixed and variable.
In a fixed annuity, the insurance company guarantees that you
will earn a minimum rate of interest during the time that your
account is growing. The insurance company also guarantees that
the periodic payments will be a guaranteed amount per dollar in
your account. These periodic payments may last for a definite
period, such as 20 years, or an indefinite period, such as your
lifetime or the lifetime of you and your spouse.
In a variable
annuity, by contrast, you can choose to invest your purchase
payments from among a range of different investment options, typically
mutual funds. The rate of return on your purchase payments, and
the amount of the periodic payments you will eventually receive,
will vary depending on the performance of the investment options
you have selected.
annuity is a special type of annuity. During the accumulation
period – when you make either a lump sum payment or a series of
payments – the insurance company credits you with a return that
is based on changes in an equity index,
such as the S&P 500 Composite Stock
Price Index. The insurance company typically guarantees a minimum
return. Guaranteed minimum return rates vary. After the accumulation
period, the insurance company will make periodic payments to you
under the terms of your contract, unless you choose to receive
your contract value in a lump sum.
Variable annuities are securities regulated by the SEC. Fixed
annuities are not securities and are not regulated by the SEC.
Equity-indexed annuities combine features of traditional insurance
products (guaranteed minimum return) and traditional securities
(return linked to equity markets). Depending on the mix of features,
an equity-indexed annuity may or may not be a security. The typical
equity-indexed annuity is not registered with the SEC.
You can learn more about variable annuities by reading our publication,
Annuities: What You Should Know. You can learn more about
equity-indexed annuities by reading our online brochure,
which explains equity-indexed annuities and provides resources
for obtaining additional information.