Types of Annuities

Before you can consider the right annuity for you, it is important to understand that an annuity is a contract between one or more individuals and an insurance company. It is nothing more than a contract in which for an exchange of payment, the insurance company agrees to provide regular, periodic income to the individual(s).

Annuities come in many forms:

1) Immediate Annuity/Immediate Annuities

If you had to guess, you probably would say an immediate annuity provides income to the holder(s) – you can have more than one owner (holder) – soon after payment is received by the insurance company. With an immediate annuity, the owner buys the annuity by paying a single lump sum payment to the insurance company. The income stream does not have to start immediately. It can be delayed for up to one year with many companies.

2) Lifetime Annuity/Lifetime Annuities

Lifetime annuities make payments to the annuitant for the duration of his or her lifetime. A lifetime annuity, like an immediate annuity, is also purchased with one lump sum payment. If the annuitant should die with cash value remaining in the contract, this remaining cash value reverts to the insurance company.

3) Deferred Annuities/Deferred Annuity

Deferred annuities are purchased with regular, periodic payments over X number of years. The insurance company calls this phase of a deferred annuity the accumulation period. During this time frame, the payments are compiled and invested by the insurance company. Deferred annuities, like all annuities, have a distribution period. Distributions for deferred annuities begin at the conclusion of the accumulation period. Most distribution periods begin when someone retires.

4) Fixed Annuities/Fixed Annuity

A fixed annuity is also called a fixed deferred annuity. It pays a fixed, guaranteed rate of interest for an initial part of the accumulation period. During the accumulation period, the fixed rate may change. The biggest cause of rate changes is existing market conditions. Most fixed annuities carry a minimum guaranteed rate and a death benefit feature.

5) Variable Annuities/Variable Annuity

Variable annuities are not fixed nor are they immediate. They are a type of annuity whose credited return varies according to the investment performance of a portfolio selected by the buyer. Typical variable annuity investment portfolios include equity mutual funds, bond funds and money-market funds.

They are not limited to only these types of mutual funds. They can also include options and riders embodying minimum guarantees for returns, income and withdrawals. An investor interested in a variable annuity must be presented a prospectus.

6) CD Annuity/CD Annuities

CD annuities are a variation on the fixed annuity. The length of the interest-rate guarantee matches the term of the contract and duration of surrender charges. This makes it similar to a bank CD. Stated another way, both have fixed interest paid for the contract term and limited liquidity because of the penalties for early withdrawal.

7) Flexible Premium Annuities

Flexible Premium Annuity is a tax deferred annuity designed to help you accumulate money for retirement. Furthermore because Flexible Premium Annuity is tax deferred, money grows faster than it would in a similar taxable investment. In this case your money is not subject to the fluctuation of the stock market. The interest rate payable on your annuity is highly competitive in the marketplace as well.

This article wasn’t intended to cover every type of annuity. It was intended to explain the most common annuities a person would encounter in the normal course of business.