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What are the Different Types of Annuities?

Different Types of Annuities When investing for your retirement, you must be careful how you allocate your money. Whether you plan to retire in a tropical paradise or travel the world, your preparation must align with these goals.

The easy way is to rely on a financial adviser to make those hard decisions. However, no one cares about your money as much as you. This article will explain and compare the various types of annuities and help you decide which option is best for you.

What Is An Annuity?



An annuity is an investment option that provides you with a regular income for a certain period, typically during retirement. It requires you to pay a certain amount to the insurance company, like AnnuityAdvantage for a regular disbursement.

You can decide how long you want the annuity contract to last. You may decide to spread the contract over a 20-year or opt for a lifetime payment. Of course, the percentage of income you receive from month to month will vary with the length of the contract and the total amount you invested.

Deciding the contract length is not the only thing you will need when opting for an annuity. You must also carefully choose the type of annuity that best suits your goals. Below, the article discusses the various types of annuity and who are the best candidates for each.

Types of Annuities



There are three main types of annuities, each with unique features and benefits. They include fixed, variable, and indexed annuities.

Fixed Annuity

Fixed annuities are similar to the Certificate of Deposit you get from a bank. The insurance companies promise a specific pay-out percentage over a period, and you get a lifetime income stream when your investment is ripe. The difference is you do not have tax rates attached to your income in this case.

As the name implies, a fixed annuity pays a specific amount of money over a specific period. How much you get monthly returns typically hinges on how much money you invested and how long you’ll be investing.

A fixed annuity typically comes in two forms:

  1. Traditional fixed rate: Under these terms, the interest rate changes with the market at the end of the investment year. In other words, your interest rate will vary each year depending on the market condition at the beginning of each annual cycle.

  2. Multi-year guaranteed annuity MYGA: This type of annuity works best for longer investments—typically ten years or higher. In this case, the investor can lock in the money at a fixed rate for an extended period, like five or more years. That way, you can better protect the investment from the effect of the changing market.

Pros

  • A fixed annuity is straightforward to understand.
  • Investors get guaranteed income and returns on investment.
  • The contract owners enjoy tax-deferred growth on their investment.
  • With a fixed annuity, it is difficult to factor inflation into the payout rates.
  • There are penalty fees attached to withdrawing your money before the surrender period.

Cons

Best For. A fixed annuity is best for people planning a stable income stream with the least risk.

Fixed Indexed Annuity

Fixed index annuities are a specific type of annuity that offers the potential for growth while still providing the safety of a fixed annuity. They work by linking the performance of an index (like the S&P 500) to the annuity. When the index goes up, the annuity value also increases.

A fixed index annuity holder does not lose money if the index goes down because the insurer agrees to pay a guaranteed minimum rate of return.

Pros

  • The annuity contract offers the potential for growth while providing the security of a fixed rate annuity.
  • The growth potential is linked to an index so that it can offer higher potential growth than a fixed rate annuity.
  • The annuity payments are based on the performance of the index. So, they can be more predictable than a variable annuity.

  • The growth potential of the annuity is linked to an index. That way, your profit may vary with the performance of the index.

Cons

  • The annuity payments are based on the index's performance so that they can be less predictable than a fixed rate annuity.

Best For:
This annuity is best for people seeking higher potential returns than a traditional fixed annuity. It is also excellent for people who want the stability of guaranteed minimum interest.

Different Types of Annuities Variable Annuity


A variable annuity is an insurance policy that provides tax-deferred investment growth and income payments. The key feature of a variable annuity is that it allows the policyholder to invest their money in various investment vehicles, including stocks, bonds, and mutual funds.

The holder puts money into the annuity, and the insurer invests the money in a variety of different securities, such as stocks and bonds. As such, the value of the annuity fluctuates as the securities in the investment portfolio change in value.

In addition, a variable annuity provides income payments that can fluctuate based on the performance of the underlying investments. That provides more flexibility and potential for growth than over types of annuity.



Pros
  • A variable annuity provides multiple income sources and has the highest income potential of all annuities.
  • Contract owners can pass on their accumulated wealth to a survivor if they die before the distribution phase.
  • Unlike it is with IRA, there are no limits to how much you can contribute to your retirement funds.
  • The contract attracts high annual fees. They can go as high as four percent of the contract value.
  • The collapse of the stock market can drastically affect your portfolio size.








Cons
Best for
:
This plan is best for people who wish to save up extra retirement funds apart from their workplace's retirement plans or IRA.

Compare the Various Types of Annuity

Different Types of Annuities
When you purchase an annuity, you are essentially investing. In return for this investment, you will receive regular payments from the annuity provider. These payments can be made monthly, quarterly, or annually. Regardless of the type you choose, you can decide when you want to start getting these payments.

  • An immediate annuity is a type of annuity that begins paying out right away. Here, you start receiving payments immediately after making your initial investment. That can be helpful if you are close to retirement and do not have a traditional pension.
  • A deferred annuity starts paying out at a later date. For example, let's say you start making payments into a deferred annuity at age 25. You will start receiving your pension funds when you retire at age 65.

Which Type of Annuity Should You Choose?


Which type of annuity is best for you depends on your circumstances and investment goals. Fixed annuities offer a guaranteed rate of return on your investment, while variable annuities offer the potential for a higher return, but with the risk that your investment could lose value.

A fixed annuity may be the best choice if you want stability. If you are willing to take on more risk in exchange for the potential for a higher return, a variable annuity may be the better option.

Image Credits:

Image 1: Image by Pix4free.org Image 2: Image by CafeCredit.com on Flickr

Copyrights © 2022 Inspiration Unlimited eMagazine


Any facts, figures or references stated here are made by the author & don't reflect the endorsement of iU at all times unless otherwise drafted by official staff at iU. This article was first published here on 13th August 2022.

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