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Types of Annuities - AnnuitySchool.org

Types of Annuities

Annuities are an investment for those seeking guaranteed income on a regular basis. There are a plethora of annuity products available from financial institutions. While many people use annuities as part of a retirement plan, annuities are flexible and offer other uses as well. It is important to know how different types of annuities work so you can choose the annuity that best suits your financial goals.

Immediate versus Deferred

Immediate annuities and deferred annuities both offer payments for the life of the owner. However, there are major differences in how these two types work. Immediate annuities begin distributing payments soon after you set up the annuity. The typical owner of an immediate annuity is someone who has reached age 65 or retirement age. The income provides additional money for the retirement years. Once payments start, immediate annuity provides regular income for a set period of time.

Deferred annuities provide income for the future. The owner sets up the deferred annuity and funds the annuity with regular payments or premiums over the course of many years. The investment continues to grow. When the owner retires, he starts to get guaranteed regular payments or distributions. The payments continue until the death of the annuity owner.

Variable versus Fixed

Annuities are either fixed or variable. Fixed annuities are stable, and the amount of the distribution remains the same. The distributions of fixed annuities have a guaranteed minimum rate of return.

A variable annuity has a fluctuating rate of return. While a minimum payment is guaranteed, the amount mirrors the performance of the underlying investments. For example, if the stock market goes up the value of the annuity increases and you get a bigger payment. If the stock market plummets, you get the minimum payment.

Variable Fixed
Deferred
  • Income payments vary based on the performance of investment sub accounts, including stocks, bonds and mutual funds.
  • Can be purchased with a single lump-sum payment or periodic payments.
  • Contract owner determines how long the length of the accumulation period and when income payments begin
  • Are good to include in retirement planning portfolio.
  • Total sales of deferred variable annuities were $140 billion in 2010.
  • Interest rate for the accumulation period is fixed at time the annuity is purchased.
  • Contract owner receives a defined amount of income on a regular schedule for a set amount of time, often for life.
  • Can be purchased with a single lump-sum payment or periodic payments.
  • Contract owner determines how long the length of the accumulation period and when income payments begin
  • Are good to include in retirement planning portfolio.
  • Total sales of deferred fixed annuities were $64 billion in 2010.
Immediate
  • Income payments vary based on the performance of investment sub accounts, including stocks, bonds and mutual funds.
  • Purchased with a single lump-sum payment.
  • Income payments begin within 13 months.
  • Are good for those who are in retirment.
  • Total sales of immediate variable annuities were $.1 billion in 2010.
  • Income payments are of a pre-determined amount and paid on a regular schedule for a set amount of time.
  • Purchased with a single lump-sum payment.
  • Income payments begin within 13 months.
  • Are good for those who are in retirment.
  • Total sales of immediate fixed annuities were $8 billion in 2010.


Funding Methods

When it comes to funding your annuity you have two main options. A single premium is a large one-lump payment. With a single premium you can invest as much money as you want. A single premium is usually required for immediate annuities.

Flexible premiums let you make periodic payments over many years. Also called installments, you can put money into an annuity monthly, quarterly, bi-annually or annually.

Death Benefits

Many annuities provide a death benefit as one of its features. After the annuity owner dies the money in the annuity passes on to the beneficiary named in the annuity. The beneficiary can be one or more people, an organization or a trust. Many financial institutions that set up annuities guarantee that at a minimum your beneficiary receives the total amount of the premiums or installments you paid. The amount of the death benefit depends on several factors including whether the annuity was fixed or variable. When it comes to death benefits for your heirs, things can be complex. It’s always a good idea to have a keen understanding of what happens to your money after your death.

With so many different types of annuities available, a person considering such an investment needs to education himself on what he needs and how annuities can fit into his financial plans as a source of lifetime regular income.