What to Know About the 4 Types of Annuities

There are lots of questions out there about annuities. Simply put, an annuity is an insurance contract used to provide income. There are several different kinds of annuities, each one holding their own unique set of characteristics. The four most common types of annuities that you will hear talked about are fixed, immediate, variable, or indexed.

Fixed Annuities

Fixed annuities allow an individual to take a sum of money and invest it for a specific period of time at a stated percentage, but often with higher rates.

A Certificate of Deposit (CD) requires the owner to pay taxes annually. The deferred annuity would only require taxes upon withdrawal but could generate fees if surrendered early.  A CD would also be FDIC insured, but annuities are not FDIC insured and are backed by the claims-paying ability of the issuing insurance company.

Immediate Annuities

Immediate annuities allow you to start income right away. In years past an individual would turn a lump sum into income only, but in today’s world, annuity companies may offer choices that allow purchasers to tap into the contract value, as well as name a beneficiary for unused balances.

Variable Annuities

Variable annuities are contracts between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date. A variable annuity is made by making either a single purchase payment or a series of purchase payments.

  Variable annuities include market risk, volatility, and oftentimes substantial fees. The list of fees can include surrender charges, mortality and expense risk charge, administrative fees,  and underlying expense fees- all charges that will reduce the value of your account and return on your investment.

Indexed Annuities

After the 9/11 decline in account values, some investors were leery about jumping back into equities.  Indexed annuities became a popular option for many investors. They allow investors to carve out a portion of dormant assets, or scale back a portion of invested assets which cause them to worry in hopes that they won’t see a great decline.

Equity indexed annuities are a complex financial instruments that allow you to invest a sum of money, and offers some protection from loss of principal, and get a return based on a stated cap rate or limit.  For example, if an individual wants to invest $100k he would participate in the growth of the market based on the performance of an index such as the S&P 500, up to stated limits. Some caution against equity indexed annuities because they are insurance products and some reps are not fully competent to address the pros and cons. As with any financial product or service, it is critical to visit a reputable financial services firm.

Bottom Line

Income is often the goal in this new economic environment.  Whether investors are looking for a specific vehicle or the advice of a financial planner, there is great relief knowing that they can be provided lifetime income.

To watch clients sit on the sidelines because of fear of investing while there are valuable options that provide lifetime income exist can be distressing. There are too many needs that can be solved for, whether it is to supplement retirement, cover long-term care costs, or pay for yearly travels.

Should you rush out and buy just any product or service? I would say no. But should you do your homework and talk to a professional to see if a particular product or service has a place in your future? Absolutely.

Deborah Freeman is a best-selling author and financial advisor with a top 10 bank. With over 20 years of experience advising clients, she is dedicated to improving their lives through one-on-one coaching.