A life insurance policy is a key element in any sound financial plan. If you should die prematurely before having built your retirement nest egg, there is no substitute to replace the income you would have earned during the balance of your career for the benefit of your spouse and children.

Annuities are a bit different than life insurance. Annuities are products offered by life insurance companies that generally fall into two categories: immediate and deferred.  Immediate annuities generate an immediate income. In exchange for a lump sum payment from you to the insurance company, they begin making payments to you, typically on a monthly basis.  These products are usually used at retirement, in order to guarantee a lifetime income.

Deferred annuities are more similar to a savings account, but unlike a savings account, they allow your investment to accumulate interest on a tax-deferred basis.  The key advantage to a deferred annuity, versus other savings vehicles, is that the taxes on your earnings are delayed until you make a withdrawal.

There are three types of deferred annuities.  Each offers a different level of risk.  Conservative investors might select a fixed deferred annuity because they offer a fixed interest rate, currently about five to six percent.

Those people who want a higher rate of return (and can shoulder the added risk) might select a variable annuity.  Returns from a variable-deferred annuity fluctuate based on the stock market’s performance.  The rate is not guaranteed and it is possible to lose principal.

Equity-indexed annuity returns are linked to the performance of a stock index, such as the Standard & Poor’s 500.  Interestingly, many of these products allow you to participate in the gains of the stock market, but without any risk of loss each year.  To further decrease risk, the insurance company guarantees a minimum interest rate, typically around one to three percent.  This category of annuities was introduced about six to seven years ago, and has become the fastest growing type of deferred annuity due to its combination of safety and upside growth potential.  Overall, when used properly, annuities can be a valuable retirement investment tool.