Before knowing how does an Indexed Annuity differ from a Fixed Annuity firstly discuss what exactly an annuity is. An annuity is a financial contract where an insurance company will provide you with a payment during retirement. It is a type of contract that is between you and the insurance company. It will help you by growing your money and providing future income after retirement. If you also want to live your life happily after retirement and want a retirement funding option then you need to know about the various types of annuities. Here we have discussed indexed annuity vs fixed annuity and which is best. Let’s go!
What is a Fixed Annuity and how does it work?
A fixed Annuity is one of the simplest annuity options in comparison to others. This annuity will provide you a set rate of return on your invested money for a set period of time ( that is between 2 to 10 Years). So if you want a guaranteed rate of interest then it would be the best annuity for you. Mark Charnet (A Certified Financial Fiduciary) said “Someone who desires principal guarantee and a guaranteed rate of interest would embrace a traditional fixed annuity,” In a fixed Annuity, the provider will calculate the income payment for the annuitization phase by the use of a total protected premium deposit, assuming that you choose the same policy.
Fixed Annuity Benefits
Fixed Annuity offers benefits to an investor who wants to save their savings and stretch them for their retirement years. Let’s explore some benefits of fixed annuity:
- Rate of Return (Guaranteed)
- Simple Contract
- Budgeting Easier
- Death benefits
Fixed Annuity Disadvantages
We have told you that fixed annuity is the simplest annuity but they do have their drawback also that are mentioned below.
- Fixed-rate guaranteed is for a certain no. of years
- Limited upside
- Inflation risks
What is an Index Annuity and how does it work?
Indexed annuities also known as equity-indexed or fixed-index annuities are complex in comparison to other annuities, this annuity pay a fixed rate of return that is based on a specific financial market’s performance. Its interest rate varies because the return for an annuity is based on indexes. Here, investors can participate in the stock market. If the market performance is good then you will get a profit and if the market is down you will get a fixed rate of return or there will be no loss of your investment. Thus people prefer index annuity because if Maket Dosenot performs well you will get zero interest for a year but your principal amount will be safe.
Indexed Annuity Benefits
Here we have listed some of the benefits of an indexed annuity.
- Stability
- Security
- Potentially higher returns
Indexed Annuity Disadvantages
- Surrender fees
- Limited growth
- Fluctuate every year
How does an Indexed Annuity differ from a Fixed Annuity?
Let’s discuss indexed annuity vs fixed annuity in detail. If you are searching for various annuity options then it is important to know about the difference between an indexed annuity and a fixed-rate annuity. Both sound very similar but they are quite different. So What is the difference between an indexed and a fixed annuity? Let’s discuss this.
Fixed and index annuities are the two types of annuity contracts that help you provide reliable retirement income. A Fixed annuity will help you to provide a guaranteed Interest rate on your initial premium deposit. On the other hand, an indexed annuity will offer higher interest rates, decided by the performance of a specified market index, for example, the S&P 500 and Dow Jones Industrial Average.
Conclusion
In conclusion, we have discussed everything about fixed annuities and indexed annuities, their work, benefits, and advantages. We have explained clearly how does an Indexed Annuity differ from a Fixed Annuity. I hope this blog has given you satisfactory information and helped you in choosing between two of them.
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