Four Types of Annuities | Which Annuity Fits Your Needs?

Four Types of Annuities

By Cathy DeWitt Dunn

saving for retirement with annuities

If you’re looking for a solution that will help you avoid ever losing money, Dewitt & Dunn is here to help. Retirement portfolios suffered big losses during the market crashes of 2000 and 2008. You can guarantee that your retirement savings won’t lose money through a Fixed Index Annuity – one of the four types of annuities.

Before we delve into the four types of annuities, let’s start with a simple question: What is an Annuity? An Annuity is an insurance product that guarantees income to meet other long-term goals. You may purchase an annuity with either a single payment or a series of payments or contributions. After purchase, the insurance company makes a regular payment to you immediately or at a scheduled date in the future.

There are four different types of annuities. We specialize in fixed index annuities because of all the benefits they offer with limited setbacks. Let’s start by taking a look at each of the four types of annuities.

Immediate Annuity

The first type of annuity is an Immediate Annuity.

An Immediate Annuity begins paying income checks immediately after being funded by a lump sum premium deposit. Income checks usually start within 30 days, and will continue for the rest of your life.

The bad news is there is sometimes no death benefit with an Immediate Annuity. Without a death benefit, the insurance company stops making payments. In addition, any principal that is not taken as income is kept by the insurance company.

For more information on Immediate Annuities, read this guide.

Fixed Annuity

The second type of annuity is a Fixed Annuity.

A Fixed Annuity is a contractual guarantee from an insurance company ensuring that they will pay you a fixed rate of interest for a fixed period of time. For instance: a 3.5% interest rate would apply for 5 years, 3.9% for 7 years, or 4% for 10 years.  Some people think of Fixed Annuities as being similar to a CD. The main difference is that a CD is guaranteed by a bank and a fixed annuity is guaranteed by an insurance company.

However, unlike a CD, money in a Fixed Annuity grows tax deferred; you do not pay any taxes on the interest earned until you withdraw it.

When buying a fixed annuity, be sure to read the fine print. Some companies offer multi-year contracts with an attractive interest rate, but that rate may only be guaranteed for the first year.

For more information on Fixed Annuities, read this guide.

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Variable Annuity

The third type of annuity is a Variable Annuity.

Over 50 years ago, baby boomers began investing for retirement. That’s when Variable Annuities became popular! Baby boomers enjoyed the tax-deferred growth offered by IRA’s and other qualified plans. But, investor contributions are limited each year.

Variable annuities offered a solution to the downside of low contribution limits. They allow you to invest in mutual funds inside a tax-deferred insurance vehicle with no investment limits.

Keep in mind, the underlying investments in variable annuities are mutual funds. This means your principal is not guaranteed and will go down in value if the underlying investments go down in value. The insurance company could entice you buy offering a guaranteed a death benefit or an income value. But, variable annuities DO NOT offer principal protection.

For more information on Variable Annuities, read this guide.

Fixed Index Annuity

We specialize in the fourth kind of annuity: the Fixed Index Annuity.

A Fixed Index Annuity combines features of the other types of annuities while eliminating some of their drawbacks. The Fixed Index Annuity has exploded in popularity over the last decade because of the ability to protect your principal and lock in market index gains. When you purchase a Fixed Index Annuity, the insurance company takes the money you’ve given them and invests it.

This portfolio of investments includes a mixture of high-grade corporate and treasury bonds. These form an income stream in the form of guaranteed interest. To skip all of the technicalities and get to the point, this means your principal will be protected. If the market goes up, you will get an interest credit. But, if the market goes down, you do not share in that loss. Therefore, you will not have to worry about any market crash affecting your retirement savings. This is just one of the reasons the Fixed Index Annuity stands above the rest.

Why Consider A Fixed Index Annuity

The Fixed Index Annuity takes features of the Immediate and Fixed Annuities, which include:

  • Guaranteed income you can’t outlive from the Immediate Annuity.
  • Principal protection and guaranteed minimum growth from the Fixed Annuity.

The eliminated drawbacks include:

  • Immediate Annuities’ lack of a death benefit.
  • Fixed Annuities’ unattractive interest rates
  • Variable Annuities’ loss of money, fees, loads, and commissions.

Fixed Index Annuities offer guaranteed lifetime income and can still provide a death benefit to your beneficiaries. They combine principal protection, the ability to get an interest credit, and a low fee structure. With benefits from other annuities included without the drawbacks, you can see why we specialize in this type of annuity.

For more information on Fixed Index Annuities, read this guide.

We invite you to watch our newly updated video series on annuities, “Securing Your Retirement Future,” free of charge. This series is designed to educate you on the different types of annuities, especially Fixed Index Annuities, and why we believe they should be part of your retirement plan. Click the banner below to gain instant access to our free educational video series. If you have any questions or would like to schedule an appointment, please feel free to contact us.

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Disclosure: Guarantees are subject to the claims paying ability of issuing insurance company.

Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated. A fixed annuity is intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. A fixed or indexed annuity is not a registered security or stock market investment and does not directly participate in any stock or equity investments or index.

Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.

DeWitt & Dunn does not provide tax/legal advice. Please consult with the appropriate professional.


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