That depends on the type you purchase. There are three types:
- Fixed annuities – They pay a guaranteed rate of interest. The insurance company determines what interest rate is offered and guarantees the payment (for example, 3.5% for a 5-year period). The principal and interest are both guaranteed. This is the safest type of annuity.
- Variable annuities – The rate of return varies depending on the performance of the underlying investment. For example, you may have a choice of mutual funds to invest in. If they perform well, you may earn more. On the other hand, if those mutual funds do poorly, you could lose money.
- Equity indexed annuities – The rate of return is tied to how well an index performs (ie. The S&P 500). These annuities combine aspects of the first two explained above. They typically guarantee a minimum rate of return (1%-2%), yet offer the potential to earn more than the minimum rate based on investment performance.