When it comes to financial planning, there are a variety of different products that can be used to achieve your goals. One such product is an annuity. Unfortunately, annuities can be complex, and many don’t understand how they work. This guide will discuss how annuities make money and provide examples of common annuity types.
How Annuities Earn Interest
There are two main types of annuities: fixed and variable.
With a fixed annuity, the insurance company agrees to provide a guaranteed interest rate for a set period of time. The insurer takes on the investment risk and guarantees that the annuity owner will receive a certain income level, regardless of what happens in the financial markets.
On the other hand, variable annuities offer investors the opportunity to earn a higher return potential by investing in different underlying assets, such as stocks, bonds, and mutual funds. However, with this type of annuity, there is no income guarantee since the investment returns are based on the performance of the underlying assets.
An index annuity is a fixed annuity linked to an external index, such as the S&P 500. This means that the interest rate on the annuity will fluctuate based on the index’s performance.
How Does The Annuity Company Make Money?
No matter what type of annuity you have, the insurance company will make money off your investment in several ways.
First, the insurance company will charge you fees for managing your account and investing your money.
Second, the insurer will keep a portion of the interest that your payments earn while they are invested.
And finally, the insurance company will make money if you annuitize your account and begin receiving payments.
Bottom Line
Annuities can be a great way to supplement your retirement income, but they are not for everyone. It’s essential to understand how they work before investing. Contact us to see if an annuity is right for you and get a quote today. Thanks for reading!
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