There are thousands of products in the annuity marketplace. Before you make a purchase, it’s important to know the different annuity types, how they vary, and how each one could benefit you.
There are five types of annuities:
- Immediate annuities (SPIAs)
- Multi-year guarantee annuities (MYGAs)
- Fixed annuities
- Fixed index annuities
- Variable annuities
There are two main categories which these annuities fall into: immediate and deferred annuities. Aside from immediate annuities, all other types of annuities are deferred annuities. Other ways annuities can differ is if they’re fixed or variable annuities, or the difference in a contract of how interest credits are calculated and given. If you’re looking for a conservative solution with reasonable growth potential, a fixed index annuity may be an ideal vehicle.
Immediate Annuity
In many cases, people purchase an immediate annuity which is also known as a “single-premium immediate annuity.” You usually pay for an immediate annuity with one payment (a single premium or lump sum). Note some other immediate annuities offer other options for premium payments. The insurance company guarantees you a fixed income for the rest of your life. In some cases, the income can continue for a certain period after death.
In this type of annuity, in turn you must sign over all the money you deposit in the annuity to the insurance carrier. A notable caveat is this is with the understanding you can’t do anything with the deposited money again, aside from receiving monthly income.
Fixed Annuity
A fixed annuity offers a guaranteed payout. During the accumulation period, your money earns interest at rates set by the insurance company or in a way spelled out in the annuity contract.
The company guarantees that it will pay no less than a minimum rate of interest. After the initial accumulation period, the fixed rate may change depending upon certain factors. During the payout period, the amount of each income payment to you is generally set when the payments start and will not change (annuitization income).
Fixed Index Annuity
A fixed index annuity comes with the guarantees of a fixed annuity along with the potential to earn interest based on an equity index’s changes. However, it doesn’t participate directly in any financial markets. So your principal isn’t subject to risk should the equity index record negative changes. A fixed index annuity is tied to equity indices like the S&P 500®.
The insurance company guarantees a minimum interest rate in your annuity contract, even when there are negative index changes. Unlike variable annuities, fixed index annuities offer principal protection, and you can capitalize on tax-deferred dollar growth. Some fixed index annuities enable you to turn income payments on and off, based on your needs. Annuity income riders also may be available for purchase with some fixed index annuities.
Variable Annuities
Unlike other annuities, a variable annuity comes with an investment feature. During the accumulation period, the insurance company puts your premiums into a separate account (this is technically a separate value). You decide how the company will allocate those premiums, depending on how much risk you want to take.
You may put your premium into stocks, bonds, or other accounts, with no guarantees, or into a fixed account, with a minimum guaranteed interest rate. If you go the “investment route,” take heed. The potential for interest credits rides on the performance of the investments in which your money is allocated. As a result, your principal and interest credits are subject to market risk.
Via an annuity rider, the insurance company may also offer minimum guarantees for income, distributions, or interest credits. Careful deliberation with a qualified financial professional before purchase is recommended. If you’re looking for a place of where to invest money safely, you may want to consider other annuity products.
Multi-Year Guarantee Annuities
A multi-year guarantee annuity is also known as a “fixed rate annuity.” In a multi-year guarantee annuity, you pay the insurance company a specified amount of money (often a single-premium payment or lump sum). In turn, the insurer guarantees it’ll grow at a defined rate of compound interest over a certain period of many years.
The interest rate guarantee lasts for as long as the annuity’s surrender period, the duration of which you can’t make a withdrawal without penalty. Unlike a multi-year guarantee annuity (which uses a guaranteed rate for a longer period), a fixed annuity uses a “banded rate” – or a guaranteed interest rate for a set period. Afterward, a fixed annuity uses a renewal rate which can vary.
What are Some Benefits of Fixed Deferred Annuities?
One of the most important benefits of deferred annuities is your ability to use the value built up during the accumulation period to give you a lump sum payment or to make income payments during the payout period. Income payments are usually made monthly, but you may choose to receive them less often. The size of the income payments is based on the accumulated value in your annuity and the benefit rate which is in effect when payments start.
The benefit rate usually depends on your age, sex, and the annuity payment option you choose, if it is a lifetime payout. There is a table of guaranteed benefit rates in each annuity contract. Most companies have current benefit rates as well. The company can change the current rate at any time, but it can never be less than the guaranteed benefit rates.
When income payments start, the insurance company uses the benefit rate in effect at that time to figure the amount of your income payment. Companies may offer various income payment options, and you, or another person of your choice, may choose the option.
Fixed Deferred Annuity Income Payment Options
- Life only: The company pays income for your lifetime, but doesn’t make any payments to anyone after you die. You might choose this option if you have no dependents, if you have taken care of them through other means or if the dependents have enough income of their own. This payment option usually pays the highest income possible.
- Life annuity with period certain: The company pays income for as long as you live and guarantees to make payments for a set number of years – called the period certain – even if you die. The period certain is usually 10 or 20 years. If you live longer than the period certain, you will still continue to receive payments until you die. However, if you die during the period certain, your beneficiary gets regular payments for the rest of that period. If you die after the period certain, your beneficiary does not receive any payments from your annuity. Each income payment will be smaller than in a life-only income option, because the period certain is an added benefit.
- Joint and survivor: The company pays income as long as either you or your beneficiary lives. You may choose to decrease the amount of the payments after your death, or you may be able to choose to have payments continue for only a set length of time. Again, because the survivor feature is an added benefit, each income payment is smaller than in a life-only income option.
What’s the Takeaway?
All annuities are different, and they vary in their contract design. Any annuity you choose should be well-suited to your financial situation, goals, and needs. It’s important to understand all the pros and cons before purchasing an annuity.
Be sure to ask your advisor the right questions:
- Is this a single premium or flexible premium contract? In other words, does the contract involve a one-time lump-sum payment, or a series of multiple payments?
- Is this a scheduled premium annuity contract or a flexible premium annuity contract? What are the terms?
- What type of annuity is this?
- What is the initial interest rate and how long is it guaranteed?
- Does the initial rate include a bonus rate, and how much is the bonus?
- What is the guaranteed minimum interest rate?
- What renewal rate is the company crediting on annuity contracts of the same type that were issued last year?
- Are there withdrawals or surrender charges or penalties if I want to end my contract early and take out all of my money? If so, how much are they?
- Can I get a partial withdrawal without paying surrender charges for reasons such as death, confinement in a nursing home or terminal illness?
- Is there a market value adjustment (MVA) provision in my annuity?
- What other charges, if any, may be deducted from my premium or contract value?
- If I pick a shorter or longer payout period or surrender the annuity, will the accumulated value or the way interest is credited change?
- Is there a death benefit (for estate planning purposes)? How is it set? Can it change?
- What income payment options can I choose? Once I choose one payment option, can it be changed?
If you think an annuity may be a suitable option, consulting with a financial professional will help you with identifying the best strategies. Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.
