PI-214 (R 03/2024) 4
How the Money is Invested
There are two basic types of annuity contracts—fixed and variable. At the time you buy an annuity contract, you will
select between a fixed or variable. This determines how earnings are credited in your contract.
Fixed Annuities
A fixed annuity provides fixed-dollar income payments backed by guarantees in the contract. During the
accumulation period of a fixed deferred annuity, your money (less any applicable charges) earns interest rates set by
the insurance company spelled out in the annuity contract. Every fixed annuity has a current interest rate and a
minimum guaranteed interest rate. The company guarantees it will pay no less than a minimum rate of interest. During
the payout period, the amount of each income payment to you is generally set when the payments start and will not
change.
An indexed annuity is a type of fixed annuity, but its returns are based upon the performance of a market index, such
as the Standard & Poor’s 500 Composite Stock Price Index (the S&P 500), the Dow Jones Industrial Average (DJIA), or
the National Association of Securities Dealers Automated Quotations (NASDAQ), which measures how the market or
part of the market performs. Over the time period defined in your annuity contract, only a portion of the performance
of a market index adds interest to your annuity. Participation rates
, cap rates, or spread rates are terms used to
describe the amount of interest added to your annuity.
The annuity’s principal investment is protected from losses in the market, while gains add to the annuity’s returns.
These types of annuity contracts are complex, and the amount of interest credited and when it gets credited to your
annuity will vary depending on the particular contract.
Variable Annuities
A variable annuity offers a range of investment or funding options. During the accumulation period of a variable
annuity, the insurance company puts your premiums, less any applicable charges, into a separate account. You decide
how the company will invest those premiums depending on how much risk you want to take. You may put your
premium into a stock, bond, or other account, with no guarantees, or into a fixed account, with a minimum guaranteed
interest rate. During the payout period of a variable annuity, the amount of each income payment to you may be fixed
(set at the beginning) or variable (changing with the value of the investments in the separate account).
Remember, you, the owner, or annuitant; bear the investment risk
as the value of the variable annuity increases or
decreases based upon the investment performance of the security. For this reason, you should be certain the annuity
purchased is suitable for your needs and investment tolerance.
Read your annuity contract carefully when you receive it. Ask your insurance agent or insurance company to explain
anything you do not understand. If you cannot get answers to your questions, call the Office of the Commissioner of
Insurance (OCI) at 1-800-236-8517.
Annuity Contract Features
The value of your annuity consists of premiums you have paid, less charges, plus interest credited. This value is used to
calculate the amount of benefits you will receive. Charges, interest, surrender rights, and benefits are explained below.
Typical Charges and Adjustments
There are many types and amounts of charges. Companies may refer to these charges by different names. Some
annuities are “front-loaded,” which means most of the costs to the company are charged to you in the beginning.
Some are “back- loaded,” which means most of these costs are charged to you later. Others spread their charges