There are three different types of annuities:
In a fixed annuity, your money — minus any applicable charges — earns interest at rates set by the insurer. The rate is specified in the annuity contract.
The insurer invests your money — minus applicable charges — in a separate account. The company invests your money in stocks, bonds or investment funds you choose, based upon your risk tolerance.
If the fund doesn't do well, you can lose all or some of your investment.
Agents and brokers who sell variable annuities must be registered with the Department of Financial Institutions (www.dfi.wa.gov).
With an equity-indexed annuity (PDF, 280KB), the insurer offers a guaranteed minimum return, plus it offers a variable rate based on the return of a specific index. During the accumulation period, the insurer credits you with a return based on interest earned plus or minus changes in the index, subject to participation rates, caps, charges and other restrictions.
The most commonly used index is Standard & Poor’s 500 Composite Stock Price Index (S&P 500) (www.standardandpoors.com).