| When an employee retires after several years of | | | | Security in a fixed annuity is linked to the financial |
| work, the employer offers monetary retirement | | | | standing of the insurance company. |
| benefits such as a cash balance plan or pension. | | | | Fixed annuities can involve a definite surrender |
| Let us consider Nancy, who has retired from | | | | period, as in the above example, or an indefinite |
| work. She likes to invest her retirement package | | | | period, such as Nancy's lifetime. |
| in something that can yield regular income. She | | | | Suppose Nancy buys a variable annuity instead. A |
| invests her money in an insurance company by | | | | variable annuity involves a range of investment |
| signing a mutual agreement between her and the | | | | options, and the rate of return is tied to internal |
| company. According to the agreement, the | | | | mutual funds. As these funds depend on financial |
| insurance company makes periodic payments to | | | | market conditions, they can go up or down, |
| her. That is, the insurance company 'sells' an | | | | thereby making the rate of return unstable. |
| annuity to Nancy. Webster's Dictionary defines an | | | | If Nancy goes in for an equity-index annuity, the |
| annuity as `a sum of money payable yearly or at | | | | rate of return can vary depending upon changes |
| other regular intervals.' | | | | in an equity index, such as the S&P 500 |
| Sometimes, even people who have yet to retire | | | | Composite Stock Price Index. According to the |
| go in for purchasing annuities as a means of | | | | US Securities and Exchange Commission, she may |
| saving for their 'rainy days.' | | | | even lose money, especially if she cancels the |
| There are basically three types of annuity | | | | annuity early. This is because equity-indexed |
| payments: fixed, variable and equity-indexed. Fixed | | | | annuities are complicated and may contain several |
| annuities are annuities in which the rate of return | | | | features that can affect the rate of return. |
| to the buyer remains constant. Suppose Nancy | | | | Annuities can be purchased by single payments or |
| opts for a fixed annuity for a 20-year time period | | | | flexible payments. They can also be purchased as |
| [known as the 'surrender period']. The insurance | | | | immediate annuities, where the yield is earlier, or |
| company assigns a rate of return and lets Nancy | | | | as deferred annuities, where it is delayed. |
| know it in advance. This rate of return remains | | | | Annuities are not insured by the FDIC and are not |
| unchanged during the entire 20 years. Because | | | | bank guaranteed. However, they are one of the |
| she knows how much she'll draw every month, | | | | most popular sources of regular periodic income |
| it's much like a monthly salary. But she cannot | | | | to most people who are spending their |
| withdraw any part of her invested amount during | | | | post-retirement years. |
| the surrender period, without some penalty. | | | | |