Common Characteristics of Variable Annuity and Equity-indexed Annuity

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All investors share the same goal of accumulating wealth in the long-term. Some of them face the problem of watching their investments rise and fall from time to time. Those who are about to retire or risk-averse ones cannot withstand the volatility within their portfolios in the short-term. These types of investors and those with moderate risk tolerance opt for annuities as their valuable investment tool. An annuity is a contract between the investor (annuitant) and an insurance company that promises to pay the investor a certain amount of money periodically for a specified period of time. Therefore, the annuity provides a retirement-income insurance plan where the annuitant contributes to the annuity in exchange for a guaranteed income in the future.
Insurance companies issue annuities and are sold by brokerages, mutual fund companies and insurers. They tend to be purchased by investors who are about to retire and other professionals who may want to protect their assets. However, the value and performance of annuities is can be affected by the high expenses and fees; therefore, it is important for the investors to choose carefully and compare the annuities before they invest. The amount they will receive according to their agreement largely depends on the type of annuity they select, amount of money invested, performance of the investment and which features they add on it. There are two main types of annuities: Immediate annuity in which a lump sum amount of money is invested and the insurance company begins to pay the investor monthly immediately; and deferred annuity in which the investor invests money with an insurance company before the retirement time (Bodie, 2013). Before investing in any annuity, the following should be considered:
* Payout- the investor should calculate the amount of money he/she is likely to receive as income based on the amount or plan chosen.
* Strength- the strength of the insurance company selling the annuity should be checked.
* Verify the returns- examine how the annuity's returns are being calculated.
* Total expenses- find out what is being charged in expenses, fees, and commission.
* Examine the death benefits- what will your family receive before the payments begin.
* Find out the surrender fees- what will be charged if the annuity is cancelled and savings are withdrawn.
Variable annuities are also referred to as mutual funds that have been wrapped in insurance policies. They are mainly sold by insurance companies and brokerage firms. There performance is based on that of underlying investments that are held in mutual funds. They allow for investments of premiums in equity securities and are kept in sep...