An annuity is a contract between you and an insurance company to invest money with a fixed or variable return rate. Income isn’t taxed until withdrawn from the contract, making annuities an excellent way to save for retirement. When you retire, you begin receiving payments for life.
With a fixed annuity, you make regular payments to an insurance company for a period of years. The company credits you with interest at a fixed rate stated in the contract. The rate of return on the fixed annuity depends on the size of the regular payments that are made and on how long you live. The size of payment is agreed upon in advance and specified in the contract.
A variable annuity earns a variable rate. With this contract, you have the responsibility of directing the investment performance of the annuity’s accumulation account. The insurance company provides you with a menu of investment opportunities.
The purpose of giving the annuity holder more responsibility and more choices is to encourage him or her you to try to earn even larger investment returns. Investments in bond funds and stock mutual funds fluctuate in value; so does the accumulation account of a variable annuity. While you are given the opportunity to earn a larger return, you will also bear more risk.
Which annuity is best for you? Contact a Cato Insurance Group agent at 1-888-775-CATO (2286) to help you decide.