Types of Annuities
There are basically two types of annuities: Immediate and Deferred.
An immediate annuity begins paying a benefit very soon, usually within 30 days to one year after it is purchased and usually requires a lump sum payment. The decision to annuitize is immediate.
With a deferred annuity, the taxation of the interest or other growth is deferred until it is actually paid. The decision to annuitize is deferred. Deferred annuities can take various forms. The most common are: fixed, variable and equity indexed.
More Annuity Options...
1. Fixed Annuity - This type of annuity accumulates interest on the funds deposited into the annuity on a fixed rate basis. Every fixed rate annuity has a current interest rate and a minimum guaranteed interest rate. The current rate will always be equal to or higher than the minimum guaranteed rate. These can vary by company and contract and the current rate is declared on an annual basis, usually after an initial guarantee period. The insurance company assumes the risk of paying at least the minimum guaranteed interest rate.
2. Variable Annuity - This type of annuity pays varying rates of interest on the funds inside the annuity based upon the investment options chosen by the annuity owner. It can be compared to a mutual fund. There is typically no safety of principal because the insurance company invests the money as the policy owner selects in separate funds that have market risk (i.e. stocks, bonds, etc). If the investment choices do poorly, the annuity will not grow and could even lose value. The growth of the annuity is not guaranteed by the insurance company and the owner assumes all risk.
3. Equity Indexed - These types of annuities pay an interest rate that is tied to the performance of a common or well-known index such as the S&P 500 The growth of the annuity is based upon the participation rate of the index it is tied to. Most indexed annuities specify a minimum interest rate so that if the index goes down, there is a minimum interest rate applied to the annuity. This allows you to participate in the upside and growth of the market while protecting against a bad year. You are guaranteed to receive back at least all the principal and the minimum interest rate. There are many other factors which go into an equity indexed annuity. We can help you understand them and assist in making the right choice.