Distinguishing Characteristics among Fixed, Indexed, and Variable Annuities

The annuity arena offers consumers a wide range of options that can potentially help them prepare for retirement.

Fixed

Traditional fixed annuities appeal to consumers who either have a low tolerance for risk or those who believe that a portion of their retirement money should be well diversified. Generally speaking, traditional fixed annuities offer an interest rate determined by the insurer. The initial interest rate can be guaranteed for one year or some annuities can guarantee an interest rate for 3, 4, 5, 7, or 10 years. In fact, in some instances, the insurer can offer a bonus interest rate during the first years but in all instances, there is an interest rate guaranteed for the life of the annuity.

Fixed-Indexed

Fixed-Indexed Annuities also appeal to those who have a low tolerance for risk and or for consumers who wish diversification. However, owners of Fixed-Indexed Annuities can seek a little higher return than with a traditional fixed annuity since their annuity earnings can be credited based on an index. Generally speaking, the consumer has the option to select a Fixed-Indexed Annuity from a wide range of insurers. In fact, some insurers give the annuity owner the option to select the index or indexes. And since Fixed-Indexed Annuities can credit earnings a variety of ways from Annual Reset, High Water and Point to Point (discussed earlier) prospective annuity owners can even select the crediting method that makes the most sense to them. Or, better yet, they can diversify.

Variable

Variable annuities appeal to those who seek a greater possible reward than either a Traditional fixed or Fixed-Indexed Annuity can provide since a variable annuity provides a wide range of investment options with various levels of risk. Investment options can range from a wide spectrum of choices like Global, Technology, Non-Investment Grade Bonds, Government Bonds, and Money Market etc. However, owners of variable annuities have additional options and enhancements like Dollar Cost Averaging and Living Benefit Guarantees, and Death Benefit options.

In closing, the best type of annuity is the one that is best for the consumer; the annuity or annuities that can potentially accomplish what they want accomplished. And, you, as a financial professional, can help them get what they want by ascertaining their tolerance for risk, their time horizon, and their goals by asking a series of questions, listening carefully to their answers, and caring about them and their retirement.

Are all annuities equal? No, they are not, however, it is important for you to know how to distinguish the difference. Earlier, we outlined a series of questions to ask about each type of annuity that you are considering to assure that both you and the consumer know how their annuity will work. These questions do not favor any specific company or annuity type. While the questions that we have prepared for each type of annuity seem complete and exhaustive, it makes a great deal of business sense to allow the insurer to emphasize, in writing, the additional benefits that you should also consider.

We have also included in the Reference Chapter a series of important questions to ask at the point-of-sale. These questions when amended by you and then added to the questions you already ask at the point-of-sale will increase the probability of you helping the consumer enjoy a more comfortable retirement.