What is an Annuity? An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. If the payments are delayed to the future, you have a deferred annuity. If the payments start immediately, you have an immediate annuity. You buy the annuity either with a single payment or a series of payments called premiums. There are two types of fixed annuities. Traditional Fixed Annuities and Equity Indexed Annuities. Traditional Fixed Annuity With a traditional fixed annuity, the insurance company guarantees both the rate of return and the payout, as its name implies. Equity Indexed Annuity An equity index annuity in the United States is a type of tax-deferred annuity whose return is indexed to an equity index, typically the S&P 500 but which also guarantees a minimum interest rate (typically about 3% as of 2007) and against a loss of all or most principal. An equity index annuity is a contract with an insurance or annuity company. The objective of purchasing an equity index annuity is most often to realize greater gains than those provided by fixed annuities, while still protecting principal. Contract terms can vary from 1 year to 17 years or more, depending on the annuity.
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