An annuity basically refers to a financial product that’s normally used by investors for saving tax-deferred money for their retirement, or for generating regular income payments. This helps to replace paychecks when people retire. Even though they might seem like modern kinds of financial investments, annuities have been around a long time. Since the beginning, they’ve grown to become high-demand products, with more and more sophisticated annuity contracts that are tailored to meet an individual investor’s desires and needs.
Even though there are several types of annuities, they all narrow down to the same thing: insurance contracts that offer guaranteed income, mostly for life and at times, with a certain capital appreciation. They are meant to supplement the income from a bond portfolio and traditional stock. Since annuities are liquid in nature, it’s never advisable for one to invest over 50% of a given investment portfolio in just one type of annuity.
Annuities usually provide retirees with the assurance that they’ll have a certain stream of income, irrespective of market performances. In short, they provide certainty in today’s uncertain world. If you need help with any financial services in the area of San Bernardino, CA, we have resources for you.
Below is a comprehensive list of the 5 basic types of annuities:
An immediate annuity represents the easiest type for a lot of people to understand. This is mainly because in their most common forms, immediate annuities have very basic provisions. It typically involves someone paying a lump-sum to an insurance firm up front, in exchange for the right to receive regular payments from the insurer, starting immediately.
As an individual, you can choose to structure immediate annuities to pay for your whole life, for a certain fixed time period, or even for as long as you and the person you chose as the beneficiary are still alive. Payouts on the majority of these annuitites are usually interest-rate sensitive. As such, when the rates are lower, the total amount of the future income that you will get from immediate annuities can be quite small.
Furthermore, if you happen to choose this annuity based entirely on your own life, and you pass away shortly after purchasing it, the sum of money that’s been spent on the premium might be lost if you don’t pick a rider for the contract. Nonetheless, as a way of guaranteeing an income stream as long as you’re alive, immediate annuities can be very useful.
Fixed annuities refer to annuities whose value generally increases, depending on the stated returns in the contract. These annuities usually don’t have payments that start right away. However, unlike the deferred income annuities, you’ll retain the flexibility of choosing when to start getting payments from insurance firms under the contract.
The rate of interest can be quite high on a fixed annuity, as compared to bank CDs and other common income investments. In addition, they are tax-deferred as well. However, you should be careful about whether you’ll be able to access the money whenever you need it, together with any tax consequences and penalties that might follow.
These are basically fixed annuities, with variable rates of interest added to the contract value, in case an underlying market’s index is positive. They usually offer guaranteed minimum income benefits. A major drawback of Fixed-Indexed annuities is the fact that the upside potential is normally limited by a participation rate, spread or caps, all techniques where your returns with rising stock markets are trimmed.
As a result, the buyers of these types of annuities usually can never keep up with the pace of robust markets. These types appeal to pre-retirees and the retirees who would like to participate conservatively in a potential market’s appreciation, without any fuss.
Deferred annuities typically delay payments until a future date, usually more than 1 year from the contract initiation. These annuities enable people to raise their income streams in life for less amounts of money. This is mainly because the insurance firm isn’t always on the hook for a long time period when payments are deferred.
These annuities appeal to individuals who are looking for a guaranteed income source in the future, ones who don’t require any payments immediately. They are looking forward to building an income ladder over different time periods in their lives. For example, a person might want to work when they’ve retired, but they knows that in the long run, they will be forced to quit working. At that particular point, they’ll need that money from the annuity. When compared to the other annuity types described above, deferred annuities usually have reasonable fee rates.
A variable annuity refers to a contract signed between you and the insurance firm. You will open an account using funds that are typically earmarked for retirement. That insurance firm then invests your funds in several subaccounts (mutual fund-like investments), and your account’s value can shrink or grow with those underlying investments.
The available fund subaccounts usually range from aggressive stock funds to conservative bond funds. These annuities allow the investors to pick from a selection of subaccounts. The account’s value is ultimately determined by the performances of the selected subaccounts. In addition, a rider can also be bought on top of this, so as to lock-in guaranteed income streams, irrespective of the market performance.
These types of annuities are quite popular amongst pre-retirees and retirees seeking to take a shot at capital appreciations, together with a guaranteed lifetime income.
You should always keep in mind the fact that there are several other annuity types beyond these five. Also, many insurance firms use names which are a little different than the ones above. Nevertheless, when you understand these 5 types, it’s enough to help you deal with whatever products/services that your insurance firm offers to you, and also assess whether they are a clever move for your own financial portfolio.