{"faq_footnote":"\u003ca target='_blank' href='https://www.investopedia.com/ask/answers/092815/what-are-biggest-disadvantages-annuities.asp'\u003ehttps://www.investopedia.com/ask/answers/092815/what-are-biggest-disadvantages-annuities.asp","answer":["Annuity distributions are taxed as ordinary income, which is a higher rate than that for the capital gains you get from other retirement accounts.","Annuities charge a hefty 10% early withdrawal fee if you take money out before age 59½."]}

["Just a certain percentage of the account will participate in the market earnings.","Some contracts have a 5-to-10 year waiting period (Surrender Period) and there can be a fee for early termination or excessive early withdrawals.","Investment options may be less than the ones in ETFs or mutual funds, although the downside protection of indexed annuities does not exist with an ETF or mutual fund."]

The fixed amount that is paid each year is often adjusted based on current interest rates. And, most insurance companies offer a fixed rate of return that the payouts will not fall below. To ensure that distributions keep pace with inflation, consider an annuity with a cost of living adjustment.

{"answer":["If you have an income based annuity, most insurance companies do not publish an interest rate. They only provide you with the income amount.","If you purchase a Fixed Index Annuity, your interest rate is not guaranteed, but it will never be lower than zero. It depends how the index or indices you are tracking perform. An annuity quote will normally show you guaranteed values and hypothetical values based on the past performance of your chosen index."],"reminder":"\Reminder: An annuity's interest rate on the market value side may be less important than the interest rate of the Benefit Base side of the annuity. If your interest on the Benefit Base is guaranteed to rise 5-7% that may be more important than the growth on the market value.

The potential returns of an annuity depends on the terms and conditions of each particular contract. The terms of some annuities may result in lower potential returns, and the terms of other annuities may allow higher potential returns. We believe that for many investors, uncapped FIAs provide the best opportunity for potential return, though the appropriate contract will depend on your specific circumstances, objectives and risk tolerance.

A Cap is a limit on the amount a policy owner can earn in a given year. For example, a Cap of 6% means the potential maximum annual return would be 6%. A Participation Rate is simply the percentage of an index that is used to calculate the return that a policy provides. For example, assume that a given crediting method results in an 10% interest credit. If the participation rate is 70%, then the final level of interest credited to the contract owner is 7% (70 percent of 10%).

Fixed annuity interest rates correlate to national interest rates when you sign the contract, so it's generally better to buy a fixed annuity when interest rates are high. Even though fixed-rate annuities generally lock in a pre-defined interest rate, this lock doesn't always work in your favor. If interest rates rise, you incur the opportunity cost of not earning more with another investment. Further, the amount of interest paid might not keep pace with inflation.

Of the four methods – annual reset, point-to-point, high water mark, and averaging – most people will probably do better with averaging. The value of the index is taken at different points during the year and averaged to allow for a smoothing of both increases and decreases. Each crediting method is usually better than another under certain market conditions, making it difficult to pick an all-around 'best'.

In general, fixed annuity yields are currently higher than CDs and bonds. It's also expected that the US will have a low-interest-rate environment for a while. Whenever fixed annuities pay higher rates than other safe investments, they are worth considering.

No. A life insurance company cannot declare bankruptcy. If they fall below the dollar-for-dollar legal reserve requirement, they go under supervision and if the delinquency is not resolved in a timely manner, they may go into receivership with the state. The state will transfer your policy to another carrier and all guaranteed elements of your policy remain intact.