Other types of Retirement Annuities



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Equity-indexed Annuities

An equity-indexed annuity earns interest that is linked to a stock or other equity index. It credits a minimum rate of interest, just as a fixed annuity does, but its value is also based on the performance of a specified stock index. An equity-indexed annuity is different from other fixed annuities because of the way it credits interest to the annuity’s value. Most fixed annuities only pay interest calculated at a rate set in the contract. Equity-indexed annuities pay interest using a formula based on changes in the index to which the annuity is linked.

An example: Jane’s return is based on the increase of a stock or equity index, such as the S&P 500. If stocks rise, Jane benefits from the increase. If stocks fall, Jane does not lose any money. Most contracts guarantee a minimum return. However, the company that issues the annuity will limit the maximum returns that Jane may receive from a rising market in return for the downside protection they provide.

Bonus Annuities

This can give the potential owner a signing bonus up to 3 to 5%. With bonus annuities, it is easy to get money out. All a broker needs to do is agree and reduce his commission in return for the annuity owner receiving the bonus. This annuity will need to mature for at least seven years. One caution, this annuity plan has penalties for early withdrawal.

An example: If Jane buys an annuity with a bonus credit, the insurer gives her a bonus of generally 1 to 5% of the initial investment. Thus, her investment of $100,000 instantly becomes $105,000 if given a 5% bonus.

These bonus annuities often also have serious trade-offs, including higher fees and longer surrender periods.

Private Annuities

Private annuities are greatly attractive to wealthy people. Such annuities are arrangements that are made with a private obligor, which means the obligor cannot be in the business of issuing annuity contracts. These arrangements serve as an excellent tool to transfer property for asset protection and tax reasons. If appreciated assets are used to fund the annuity contract, the annuitant pays no capital gains on the transfer.

A private annuity is a contract to make payments for a specified period of time and the payment obligations cease at the death of the recipient. Because payments only occur during the lifetime of the recipient, the private annuity does not have any death benefits that need to be funded.

Commercial Annuities

With a private annuity, individuals can typically transfer property other than cash, such as appreciated stock or real estate. But with a commercial annuity, they can invest only cash. While a private annuity arrangement is made with a private obligor, a commercial annuity is a contract entered into with a company that sells financial products.

The commercial annuity contract provides that the company will be obligated to make payments to the beneficiary for a specified period of time. The time period may begin immediately or late in the future. Some commercial annuities will provide benefits after the death of the owner and thus, when funding such an annuity, both lifetime beneficiaries and the after-death beneficiaries will need to be funded.