A table, a chair, a bowl of fruit and a violin; what else does a man need to be happy? - Albert Einstein
An annuity is a contract you can have with an insurance company. According to it, you make a lump-sum payment or series of payments. In return, the insurance company makes payments to you periodically. Annuities usually offer tax-deferred growth of earnings and can involve a death benefit that will pay a beneficiary a guaranteed minimum sum.
The two main types of annuities are fixed and variable annuities. With a fixed annuity, the insurance company guarantees that you will earn a minimum rate of interest. The company also guarantees that the periodic payments will be an amount per dollar in your account. The periodic payments may last for a specific period, like 25 years, or an indefinite period, like your lifetime. With a variable annuity, you can opt to invest your purchase payments from a range of investment options, most commonly mutual funds. The rate of return on your purchase payments, as well as the amount of the periodic payments you will receive in the future, varies depending on the performance of the investment options.
An equity-indexed annuity is a special kind of annuity. During the accumulation period, the insurance company credits you with a return according to changes in an equity index, like the S&P 500 Composite Stock Price Index. The insurance company usually guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you as agreed upon, unless you wish to receive the contract value in a lump sum.
Variable annuities are securities, while fixed annuities are not. Equity-indexed annuities combine characteristics of traditional insurance products and traditional securities. They provide a guaranteed minimum return, which is linked to equity markets. Depending on their features, they may or may not be considered securities. The usual equity-indexed annuity is not registered with the SEC.