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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Friday, October 13, 2006

Annuities

Fixed-Income Annuity
You deliver a lump sum to the insurer and they pay you a set amount each month. As you get older and as interest rates rise you are paid more. You know how much you will receive each month which helps when you budget. However, inflation can eat away at your monthly payment. Shop around because all insurers are not the same and do not give the same rate.

Variable-Income Annuity
You invest a lump sum in a something that resembles a mutual fund called a subaccount. The amount of your first check is based on your life expectancy and assumed interest rate. The performance of your subaccounts will determine the rest when it comes to your payouts. If subaccounts perform well you will get larger payments and not have to worry about inflation. You are guaranteed payments for life, but there is no certainty to what the amount of those payments will be plus if the market goes bad your portfolio usually will suffer. Watch out for fees because they will eat up your payments.

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