An annuity fund is where the investment portion of your annuity policy resides. There are a two main types of annuity policies and the annuity funds for each are different.
Fixed Annuity Funds
Fixed annuities have annuity funds that pay a predetermined set rate of return like a certificate of deposit or bond. The insurance company evaluates the risk involved, analyzes the fixed securities market, and sets a rate of return.
Immediate annuities with a fixed rate of return pay an amount that does not change over the life of the annuity. Holding the rate of return constant is how the issuer can determine the amount of the guaranteed lifetime income to pay out for the one-time lump sum investment.
A fixed retirement annuity receives steady contributions between now and when you retire. When you initially start investing, the insurance company will set a fixed rate of return and sometimes a minimum rate of return.
The annuity might have a clause that allows the insurance company to increase the payment if investment returns increase allowing them to be competitive with market interest rates should market rates increase. Remember, they want you to keeping making your contributions.
Where are Fixed Annuity Funds Invested?
The annuity funds go into the company’s general portfolio and not into an account set up solely for you. Asset managers conservatively divide the money between various investments. The bulk is used to purchase predictable government securities and investment-grade bonds or preferred stocks. They invest the remainder in blue-chip stocks and commercial real estate.
Insurance companies are experts at receiving above long-term market returns on balanced portfolios. Assuring that your funds are available as needed and enabling them to offer you low-risk returns that are better than you could obtain on your own.
Variable Annuity Funds
Variable annuities do not have a set payment rate. You invest the annuity fund in stocks and bond portfolios that have the potential to give you a higher return on your investment. A retirement annuity fund from Fidelity Investments provides more than 50 different options ranging from growth stocks to government bonds.
Passive investors can choose balanced target date funds or equity index funds and sit back. Maybe you want to manage your investment funds actively. You can move money between domestic equity funds, international funds, bond funds, and individual sector funds as you think is appropriate to profit from shifting economic conditions.
A major attraction of variable annuities is the extra tax-free growth of principal compared to a fixed annuity. The downside is that your annuity fund can lose value when markets decline while a fixed annuity continues to grow.
Wouldn’t it be great to have the upside profits of a variable annuity and the stability of a fixed annuity? Well, you can.
Annuity fund insurance is a form of portfolio value protection insurance. It is written into some annuity contracts and available as an insurance rider for many variable annuities. The protection is only available on select balanced portfolios that combine a mix of stocks and bonds. You give up the right to active trading.
One common form of annuity insurance reduces your increase in good years as you share a set percentage of all gains with the issuer. In return, your portfolio does not lose any value in bad years. This form is usually written directly into contracts.
Separate insurance riders like the secure income benefit that Vanguard Group uses with its variable annuities. You pay a premium based on a percentage of your annuity value. You are guaranteed a set percentage of your initial portfolio you may withdrawal each year for life. Once you start taking withdrawals, the amount of your withdrawal can never go down even if the current value of your account drops to zero. However, the payments can go up.
In good market years, the value of your annuity fund increases. The new value is the basis for the rest of the guaranteed payment to a higher amount. Once increased, your payment never goes down.
Death and Your Annuity Fund
Upon your death, what happens with your annuity fund depends on the current stage of your contract. If payments have started, they will continue to a joint beneficiary until that beneficiary’s death. When there are no living beneficiaries, the issuer receives the balance of the account.
When the annuity fund is pre-withdrawal, the value of the account can be paid out to any listed beneficiaries. If the beneficiary is a spouse or partner, the contract can be transferred solely into their name.
A third option exists. The return of premium rider ensures that the annuity fund owner will never receive a payout of less than the amount of money invested. If the owner dies before receiving the full amount, the remainder goes to a designated beneficiary like a life insurance policy benefit. Sometimes the rider is written to cover the full current value of the account.