Understanding The Different Types Of Annuities
Annuities can come in many different types – or “shapes and sizes.” For instance, there are income annuities that start to pay a stream of income right away and options that can delay the start of income payments to a future date.
Different types of annuities imply that it can be easier for you to closely customize a strategy to fit your specific needs and goals.
In addition, you can choose an annuity based on how the return is calculated for the funds in the account. For instance, investors who are risk-averse may decide to go with fixed annuities, while those who are seeking the opportunity for a higher return could choose fixed-indexed annuities or variable annuities – although the latter alternative can come with some added risk.
All of this information will be provided below – so let’s dive straight into it!
First And Foremost: What Are Annuities?
Annuities are insurance products that can provide guaranteed income for life or a fixed period of time to the annuitant. You build the cash value of your annuity with certain tax advantages.
Depending on the type, you’ll have fixed or non-fixed interest rates.
Annuities can be paid in premiums or a lump sum payment, and they can be optimized for long-term income goals. The annuity holder can also determine the payout structure of the annuity.
Deferred vs. Immediate Annuities: When You Will Start Receiving Annuity Payments?
Based on the contract payout option, annuities can be structured as immediate annuities and deferred annuities.
Immediate annuities, as the name suggests, will start with your payments right away. An immediate annuity is usually funded with a single lump sum. The contract owner can use an immediate annuity to supplement retirement savings.
On the other hand, deferred annuities offer tax-deferred growth during the income accumulation phase, and it starts with payments later, at the particular date that the annuity buyer specifies. As such, a deferred annuity is better for retirement planning.
There are typically early withdrawal – or surrender – charges incurred with all types of annuities if you cancel the contract before a specific time frame has elapsed or take more than a stated maximum from the contract value in a given year.
With that in mind, these financial vehicles should always be considered long-term commitments for guaranteed income.
P.S. As this insurance product is often used for a retirement strategy or compared to investment vehicles, read our guide on annuities vs. pension retirement plans for more.
What Are The 4 Types Of Annuities?
Four main annuity types are:
Below, we have explained every type of annuity in detail. So, you can use the information to choose the one that would benefit you the most.
A fixed annuity provides the safety of the principal in any type of market environment, along with a stated return. There are no risks attached because of the fixed interest rate, and its value won’t fluctuate with the market.
A fixed annuity is not an investment per se, though. The growth that takes place in the account is tax-deferred; no taxes will be due until the time of withdrawal.
Fixed annuities also pay out a guaranteed amount of fixed-income payments. Based on the income payment option that you choose, the payouts can last for a certain period of time – or even for the remainder of your lifetime.
MYGAs or Multi-Year Guaranteed Annuities belong to fixed annuity contracts.
They are structured the same as fixed annuities – but they have a guaranteed interest rate and guaranteed income for a fixed period, such as three-year, five-year, seven-year, etc.
If you come to the end of the interest rate guarantee period, you can typically choose to re-invest for another length of time, withdraw all of your funds with no early withdrawal penalty, or start receiving income.
Bear in mind that the interest rate of an MYGA may change if you choose to renew the contract for a new fixed period of time.
A fixed indexed annuity, or FIA, can provide a “best of both worlds” experience. That is because the interest rate of return is based on the performance of an underlying market index, like the S&P 500.
When the index does well in contract years, a positive return is credited to the annuity – often up to a set maximum, or “cap.”
However, in years when there is a negative market performance, the annuity will not lose value. Rather, it is typically credited with a guaranteed minimum “floor” that is usually between 0% and 2%.
So, there are no negative returns to make up for – and the previous gains are locked into the annuity contract.
An indexed annuity also offers guaranteed income.
That can be through a series of payments that last for a certain period of time. Or, you can choose to receive a lifetime income that continues for the remainder of your life.
(SPIA) Single-Premium Immediate Annuity
An SPIA is a type of annuity. It is also called a “Single Premium Deferred Annuity” or SPDA.
A Single-Premium Immediate Annuity is an annuity that requires only one lump-sum premium payment made at – or near the start – of the contract.
During the payout phase, payments are usually made on a monthly basis and continue for a certain period or your entire lifetime.
SPIAs can be purchased from an insurance company directly or via a broker, financial planner, or financial advisor. It is essential to understand how much monthly income one will need before purchasing an SPIA annuity.
Variable annuities can generate a high return because the performance is based on underlying investments like mutual funds (although your money is not directly invested in the market). It doesn’t have a fixed interest rate like some other types of annuity.
Depending on the investments offered by the life insurance company, a variable annuity can provide you with a significant amount of return.
However, although the growth is usually not capped, if the stock market – and in turn, the investment options – perform poorly, there is a risk of loss.
So, if market volatility and the loss of principal make you uncomfortable, then a variable annuity may not be the best option for you. In addition, while variable annuities can provide you with lifetime income, the account value can vary greatly.
Narrowing Down The Best Annuity (If Any)
Even though annuities can be beneficial for many people, they are not suitable for everyone. Plus, there are many different types of annuities, making the decision a bit overwhelming.
What Is The Best Type Of Annuity?
To narrow down the best annuity for you, make sure that you have a clear understanding of how each type works and that you’re aware of any possible risks that you could be subject to here.
In addition, ask yourself if having a stream of income is essential or if you want to focus on building your retirement savings on a tax-deferred basis. An annuity could provide you with both.
Also, the financial professional that you work with may or may not have your best interest at heart during this process. For example, “captive” agents can only offer the annuities from their own company’s “shelves.” However, an independent agent is not obligated to sell the products from just one insurance company. Instead, these advisors can offer you a much wider range of options.
What Is The Safest Type Of Annuity?
Fixed annuities are safer than other types because they can provide a steady income due to the fixed interest rate. The money you have in this type of annuity will grow steadily. They are also considered a good choice for lifetime annuities and efficient retirement planning.
MYGA is another safe option because its value doesn’t depend on the market.
If you want an immediate safe annuity, an SPIA that’s funded by a lump-sum premium is a good option. It’s most commonly used to supplement retirement income.
What Is The Highest Paying Annuity?
A variable annuity can have the highest payout, but it’s also the riskiest option. Its value will depend on the underlying portfolio of investment options. Therefore, the contract owner is exposed to market risk, which can go either way.
On the other hand, fixed annuities provide steady money growth, and if considered long-term, they are the highest paying annuities.
Also, a fixed indexed annuity might be the solution. It manages to strike the right balance between an opportunity for a high payout and stability. The money in it grows tax-deferred – and even though it’s based on the performance of a market index, your money is protected by the minimum “floor” amount if the performance is negative.
Finding The Best Annuity Rates & Insurance Company
As mentioned before, an annuity is a life insurance product – and as such, its price will depend on many factors, including:
- Life expectancy
- Structure of the payments
- Longevity risk
- Interest rates
There are so many things you need to consider in your annuity contract, such as the death benefit, its potential for investors, the structure of the contract, payments, and so on. Not to mention, there are many insurance companies on the market offering different deals. And of course – not all of them will be equally affordable.
At Insurance Geek, we’ve decided to help you find an annuity program you’re looking for:
On our page, you will find a free quote form that will generate a variety of quotes from over 30 life insurance companies that are our carriers.
That means that you can find the cheapest deal from an insurance company that has what you seek!
You only need to give us some basic data about yourself – and we will instantly obtain the quotes for you.
Final Words: Your Annuity Insurance Contract
We hope that you found all the information you were looking for as a potential annuitant.
Whether you want to use an annuity for your retirement planning or you’re looking for immediate payments, you’ll find an insurer you can trust with your money – just use our annuity rate calculator!