Annuities are contracts with an insurance company where you make payments, and in return, you receive payments in the future. A key question for investors is whether they risk losing their principal when investing in an annuity. The answer depends on the type of annuity.
Fixed annuities generally guarantee your principal. The insurance company promises a specific interest rate, and your initial investment remains safe from market fluctuations. However, variable annuities invest your money in subaccounts, which are similar to mutual funds. This means your principal is subject to market risk, and you could lose money if the investments perform poorly. Indexed annuities offer a blend of both, tying returns to a market index but typically offering some principal protection, though often with caps on potential gains.
Before investing in any annuity, it's essential to carefully review the contract and understand the associated risks and fees. Talk to a financial advisor to determine if an annuity aligns with your financial goals and risk tolerance. Consider factors like surrender charges, which are fees for withdrawing money early, and the insurance company's financial stability. Understanding these aspects will help you make an informed decision about whether an annuity is the right investment for you.
Annuities and Your Principal: What Investors Need to Know
Annuities can be a complex investment. Understanding what happens to your initial investment, or principal, is crucial before buying. While some annuities guarantee the safety of your principal, others expose it to market risks. This article clarifies the different types of annuities and the potential risks to your investment.
Source: Read the original article at CBS