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Annuity Basics
Annuities are retirement investment vehicles created and maintained by life insurance companies. Several different types of annuities exist, each with its own set of pros and cons, and not all annuities are suitable for every investor or situation. Fixed annuities typically feature a predictable interest rate and protection from market volatility. Both the principle and interest in fixed-annuity contracts are guaranteed by the issuing insurance company.
Certificates of Deposit
Bank CDs, like annuities, are available with a variety of options and from countless providers. They offer consumers a safe place to grow lump sums of money that are not needed for daily expenses. CDs and fixed annuities alike carry a specified interest rate and term. Money used to purchase a CD remains shielded from economic industry downturns and is guaranteed to be available. Bank deposits, including CDs, are insured by the Federal Deposit Insurance Commission. Annuities are not protected by the FDIC, and guarantees -- which are made by the issuing insurance company -- are based on the company's claims-paying ability.
Treasury Bonds
Treasury bonds are IOUs from the U.S. government. Anyone may purchase Treasury bonds in increments of $100. These bonds don't mature for 30 years, but during that time the owner will receive a guaranteed quarterly interest payment. When the 30-year term expires, the bond's face value is returned to the owner. Since bonds are purchased from the U.S. Treasury, the assurances and guarantees associated with them come directly from the government.
Savings Accounts
Similar to CDs, bank savings accounts provide a government-insured place to save money. Ordinary savings accounts offer a fixed annualized interest rate, and both the principle and accumulated earnings are guaranteed by the FDIC. Unlike annuities, savings accounts do not restrict access to money or penalize account owners for taking withdrawals before they retire.
References
MetLife: Answering Your Questions About Annuities
Bankrate.com: Annuities vs. CDs
AllThingsAnnuity.com: Fixed Annuities vs. CDs
Bankrate.com: Annuities vs. CDs
AllThingsAnnuity.com: Fixed Annuities vs. CDs
Resources
ImmediateAnnuities.com: Non-Qualified Annuity Tax Rules
Securities and Exchange Commission: Annuities
Securities and Exchange Commission: Annuities
About the Author
Gregory Gambone is senior vice president of a small New Jersey insurance brokerage. His expertise is insurance and employee benefits. He has been writing since 1997. Gambone released his first book, "Financial Planning Basics," in 2007 and continues to work on his next industry publication. He earned a Bachelor of Science in psychology from Fairleigh Dickinson University.
Article originally published on The Nest (12/12/2012)
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