Understanding annuities is not difficult once you understand that there are multiple types of annuities. There are essentially four major types of annuities – immediate, fixed, variable, and fixed indexed annuities – the fixed index annuity being a hybrid of the other three types of annuities.
An annuity is a contract between you and an insurance company, usually for retirement purposes, but can also be used to meet other long-range goals. You can buy an annuity with a lump-sum payment or with a series of payments or contributions. The insurer is then contractually obligated to make regular payments to you, either immediately or at a predetermined date in the future.
To give you a better understanding of annuities, an overview of the differences between the types of annuities is provided below.
An immediate annuity provides a monthly check for life––similar to retirement income provided by social security or pension funds. It’s important to note that immediate annuities are not designed to help grow your nest egg. And, many times, an immediate annuity won’t even adjust for inflation. Instead, it is purely a contract between you and the insurance carrier in which the carrier guarantees to keep a set amount of monthly income flowing throughout your lifetime. While guaranteed income for life can be a great feature, a huge trade off is that once you pass away, your payments may just stop. Immediate annuities do not always have a death benefit, which means that your heirs may not receive any principal left in your contract when you pass away.
>>> For a more in-depth look, see Understanding Immediate Annuities
With fixed annuities, an insurance carrier agrees to pay you a fixed rate of interest for a fixed amount of time, similar to a CD. Principal grows tax deferred and is 100% protected. However, fixed annuities have suffered in the recent low interest rate environment and do not offer any exposure to positive stock market performance.
>>> For a more in-depth look, see Fixed Annuities
Variable annuities have been around for years and were particularly popular in 1980’s and 1990’s. A variable annuity provides exposure to stock market growth through the use of mutual funds and bonds. While your principal in a variable annuity grows tax deferred, variable annuities do not protect principal. Thus, if the markets go down, your principal is at risk.
>>> For a more in-depth look, see Variable Annuities
A fixed index annuity offers the advantages found in the other types of annuities while eliminating the not-so-great features. For example, fixed index annuities combine guaranteed lifetime you can’t outlive with a death benefit that allows you to pass remaining principal to your beneficiaries. Like a fixed annuity, a fixed index annuity guarantees principal 100% and provides a minimum growth guarantee for the life of a contract…even if the markets never go up. Lastly, fixed index annuities allow you to participate in stock market growth just like variable annuities while also providing 100% protection against stock market declines…even if we see another 50% drop like we have the past few years!
For a more in-depth look, see Understanding Fixed Index Annuities
To learn more about annuities and how they may fit into your retirement income plan, we urge you to watch our free educational video series. Then, give us a call at (866) 904-4700 to discuss your specific situation.
Annuity product guarantees rely on the financial strength and claims-paying ability of the issuing insurer. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.