Understanding the Different Types of Annuities

Annuities can come in many different types or “shapes and sizes.” This can make it easier for you to more closely customize a strategy to fit your specific needs and goals. For instance, there are income annuities that start to pay a stream of income right away, as well as options that can delay the start of income to a future date.

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 choose to go with a fixed option, while those who are seeking the opportunity for a higher return could choose a fixed indexed or variable annuity (although the latter alternative can come with some added risk).

There are typically early withdrawal – or surrender – charges incurred with all types of annuities if you cancel the contract before a certain time frame has elapsed and/or if you 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.

Fixed Annuities

These annuities provide the safety of the principal in any type of market environment, along with a stated return. A fixed annuity is not an investment per se, though. The growth that takes place in the account is tax-deferred, so no taxes will be due until the time of withdrawal.

This annuity option also pays out a guaranteed amount of fixed income payments. Based on the income payment option that you choose, the payout can last for a certain time period, or even for the remainder of your lifetime.

MYGA Annuities

MYGAs or multi year guaranteed annuities are a type of fixed annuity. They are structured the same as fixed annuities, but they have a guaranteed interest rate for a stated time period, such as 3-years, 5-years, 7-years, etc. If you come to the end of a 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.

Indexed Annuities

A fixed indexed annuity, or FIA, can provide a “best of both worlds” experience. That is because the rate of return is based on the performance of an underlying market index, like the S&P 500. In contract years when the index does well, a positive return is credited to the annuity – oftentimes up to a set maximum, or “cap.”

However, in years when there is a negative index 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. This can be through a series of payments that last for a certain time period. Or, you can choose to receive lifetime income that continues for the remainder of your life.

(SPIA) Single Premium Annuity

A SPIA is a type of annuity. It is also called a “Single Premium Deferred Annuity” (SPDA).

A Single-Premium Immediate Annuity is an annuity that requires only one premium payment, made at or near the start of the contract. During the payout phase, income payments are usually made on a monthly basis and continue for a period certain or your entire lifetime.

SPIAs can be purchased from an insurance company directly or via a broker, financial planner, or financial advisor. It is important to understand how much monthly income one will need before purchasing an SPIA annuity. You can read. more about these products here.

Variable Annuities

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). Depending on the investment options 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 makes 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 amount of this can vary.

Narrowing Down the Best Annuity (If Any)

Even though annuities can be beneficial for many people, they are not right for everyone. There are many different types of annuities. So, which type of annuity is best?

In order to narrow down the best annuity for you, make sure that you have a clear understanding of how each type works, as well as any possible risks that you could be subject to. In addition, ask yourself if having a stream of income is important and/or if you want to focus on building your retirement savings on a tax-deferred basis. An annuity could provide you with both.

In addition, 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. Rather, these advisors can offer you a much wider range of options.