Main Types of Annuities
While there are many different kinds of possible annuities, as mentioned in our previous article here, some may even say new ones are created every day. There are a few key things that all annuities address in kind, and for our purposes will refer to as the main “types” of annuities that exist.
Timing of Payments:
When you pay into the annuity is obviously a key concern, not everyone can put up $100,000 in a heartbeat. Although for those that can, there’s an annuity for them too.
Immediate Annuities
These are paid for in a single transaction, a “lump sum” with all the money paid up front. Although in doing so with the understanding that you will immediately begin getting payments as soon as possible. So if you are to receive payments monthly, you get your first check at the start of the next month.
Obviously, if you want or need the income of an annuity right away, then this is a good type of annuity to select.
Deferred Annuities
This type is noted by the fact they are, well, NOT immediate! You get your checks at some later date, for example, 20 years in the future. How you fund this annuity is up for negotiation as well. Whether you decide to pay a single large amount, now and forget about it until it starts paying you. Or you slowly fund the account with monthly, quarterly, or annual payments over time.
In the latter case, it may also be of importance how they are “counted”. As in whether you put in payment at the “start” of a cycle, or at the “end”. The difference is negligible and tends to be a math quirk, and that will be explained in our nerd’s math article for all the details on how annuities are calculated.
Deferred annuities are good if you can wait on the money. A key benefit from using deferred annuities is that they benefit from compound interest, growing the annuity until payout. If two people put in the same amount of money today for an annuity, the person with the deferred annuity would receive a larger payout than the one with the immediate annuity.
NOTE: There is a tax penalty of 10% if you take money out of an annuity before you are the age of 59 and a half years old.
Timing of Checks:
This bit doesn’t usually count as a “type” in the larger industry, but for clients it’s an important part of most contracts nonetheless. You can choose to receive your checks from the annuity at a given interval, usually monthly or yearly.
Or, you can choose to receive the annuity as a lump-sum amount for your own use.
Technically it may be cheaper to receive annual payments, since there is less “work” involved as fewer checks need to be sent out and fewer balances or accounting tables to check on the company’s part. Although conversely, human beings are known to be terrible with suddenly receiving large sums of money like you would have under the yearly option, poorly planning out the money over the course of a long year.
Which is best depends on what you think you will need in the future, and how you personally prefer to receive your money.
Basis of Checks:
This is traditionally understood to be the real “meat” of different annuity types. It is how the company determines how much money you are to receive once it starts paying you.
Fixed Annuities
These are set to give you some amount of interest on your money. Similar to a bank CD, you simply receive the stated sum of money you would be owed at each interval.
Variable Annuities
On the other hand, do not have a stable payout, instead the amount you get with each check depends on the performance of investments in a “separate account”. This is a portion of money set aside specifically for these investments. You are considered responsible for your own separate account and how it is managed.
Equity Indexed Annuities
This type is basically a fixed annuities, except it may give you more money comparatively if the stock market (or some other index of investments) does well.
NOTE: Usually indexed annuities have a “cap” on how much you can gain with the market. For example, if the market rises by 20% in a single year, you may only be limited to 5% of that gain.
Fixed and Equity Indexed annuities are good for those who are more concerned with safety and certainty in their returns. You are guaranteed by the company to receive a given rate of interest.
Variable annuities can be good for those who are willing to be more involved with their investments in the hopes of achieving higher returns. Or otherwise be able to participate in market actions without a cap.
Riders and Other Changes
There are many more options and features available in possible annuities, but getting into the nitty-gritty of that is beyond the scope of this one article. Those details are covered in a second article over here.
Until then, if you have a question, give me a call at 203-956-0289. You can also send me an e-mail to wward@1stallied.com. Hope to hear from you soon!
Index annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity. Investors are cautioned to carefully review an index annuity for its features, costs, risks and how the variables are calculated. Investors should consider the investment objectives, risks and charges and expenses of the variable annuity carefully before investing. An investment in a variable annuity involves investment risk, including possible loss of principal. Variable annuities are designed for long-term investing. The contract, when redeemed, may be worth more or less than the total amount invested. Variable annuities are subject to insurance-related charges including mortality and expense charges, administrative fees, and the expenses associated with the underlying sub-accounts. The prospectus contains this and other information about the variable annuity.