Annuities

One of the reasons annuities have so many different features is that they are contracts between an annuity holder — also known as an annuitant — and an insurance company. Contracts have different provisions, different costs, different payouts, etc. The upside is an annuity can be personalized to fit your needs. The downside is the vast array of options can seem overwhelming to potential annuitants.

Understanding Annuities

Understanding the different types of annuities and how they work is crucial for investors to make the right decisions for their needs.

Main Types of Annuities

Fixed Annuity

A fixed annuity is an insurance contract that guarantees the insurer will pay the purchaser a guaranteed, fixed interest rate on their contributions to the annuity for a specific period. Fixed annuities are lower risk than variable annuities and can provide a steady stream of income in retirement.

Variable Annuity

A variable annuity is a type of annuity whose value is tied to the performance of an investment portfolio. Payments from variable annuities can increase if the portfolio performs well and decrease if it loses money. Although variable annuities carry the potential of higher returns than fixed annuities, they don’t offer a guaranteed payout.

Indexed Annuity

An indexed annuity, also known as a fixed-index annuity, is a type of annuity whose income payments are tied to a stock index, such as the S&P 500. Indexed annuities perform well when the financial markets perform well. People often refer to indexed annuities as hybrids of fixed and variable annuities.

Income Annuities

An income annuity is an annuity contract that converts all or part of a consumer’s savings into a guaranteed stream of income, either for the consumer’s lifetime or for a specified number of years. These payments can begin right away, as is the case with an immediate annuity, or at a later time, as with deferred annuities.

Single Premium Immediate Annuities

A single premium immediate annuity, or SPIA, is a contract in which you pay an insurance company a lump sum of money up front, known as a premium, in exchange for guaranteed, periodic payments for life or over a set period of time. A SPIA can begin paying out almost immediately after you purchase it or within the year.

Deferred Annuities

A deferred annuity is an insurance contract that allows you to delay or defer your income stream indefinitely. Deferred annuities differ from immediate annuities in that immediate annuities begin making payments within a year of purchase. Designed for long-term savings, a deferred annuity grows tax-deferred until you withdraw the money.