Key Takeaways
There are several different ways to categorize the different types of annuities. For instance, annuities can be categorized into types by the way you receive your payout, how the annuity grows in value and how you pay your premium to buy an annuity. These options may often be combined to let you select an annuity that best fits your plans. Wendy Swanson, Retirement Income Certified Professional™, explains the different types of annuities.
Payout options define two types of annuities: immediate and deferred annuities. These describe the ways in which you will receive income from an annuity after paying your premium. Types of Annuities Based on Payouts
Immediate annuity (income annuity) With an immediate annuity, also known as an income annuity, you begin receiving payments within a year after purchasing it. An immediate annuity is typically funded by a retirement account, such as a 401(k), and is a good option for those ready to leave the workforce but still want to maintain a steady income. Deferred annuity With a deferred annuity, you receive payments that start in the future. Typically, this happens when you retire. In the meantime, your investment grows on a tax-deferred basis. In addition to when you start receiving payments, you can choose how long you want to receive payments for. Typically, annuity payouts are used to protect against longevity risk. Annuities can provide guaranteed lifetime income, so you don’t outlive your retirement savings. But you can also arrange for an annuity to payout over a fixed period of time. How Long Annuities Are Paid by Type
Lifetime annuity A lifetime annuity guarantees an income stream for the rest of your lifetime. In some cases, lifetime annuities allow for a beneficiary to receive payments after your death. With these annuities, the amount of the payment will be set based on your health and age, since the payments are likely to continue longer for younger, healthier people. Fixed-period annuity A fixed-period annuity, also known as a term-certain annuity, pays out over a specific period of time. This type of annuity spreads out payments over a fixed period — typically 20 or 30 years. With these annuities, the age and health of the annuity holder do not affect the amount of the payments.
The longer the person is expected to live, the lower the individual payments are likely to be.
Fixed, variable and fixed indexed are the main types of annuities based on growth. You will have to consider your level of risk aversion — how you weigh preserving your investment against the potential for higher returns — when deciding on this type of annuity. Types of Annuities Based on Growth Potential
Fixed annuity A fixed annuity offers the least risk and the most predictability. Fixed annuities come with a guaranteed, set interest rate that doesn’t vary beyond the terms of the contract. While other investments might soar or dive, the fixed annuity is steady. Sometimes, however, the interest rate will reset after a predetermined number of years. Multi-year guaranteed annuity (MYGA) A multi-year guaranteed annuity, or MYGA, is a type of fixed annuity. It offers a fixed interest rate for a specified period of time — typically three to 10 years. A MYGA is generally best suited for people nearing retirement looking for a way to defer taxes while guaranteeing a return on their investment. Variable annuity A variable annuity provides you with periodic payments based on performance of sub accounts that fund the annuity’s growth. So, your payments may fluctuate. Sub accounts work in a way similar to mutual funds. The amount of your payments may be higher if the sub accounts perform well, or they’ll be smaller if the sub accounts lose value. Fixed-index annuity The payout you received from fixed-index annuities is tied to a market index — such as the S&P 500 or Nasdaq. Fixed-index annuities also protect you against losing any of your principal if the index declines. This makes a fixed-index annuity safer than investing directly into an index fund. To pay for this protection, fixed-index annuities set limits on both your gains and your losses.
Interest-rate risk is a factor in determining the calculation of your payments for annuity. Low risk yields predictable payment amounts. Higher risk could boost your expectations.
There are a couple of options for purchasing a deferred annuity — with a single lump-sum premium, or a series of payments over time. Annuity Types Based on How You Purchase Them
Flexible premium annuity A flexible premium annuity is one that you purchase through a series of premium payments. They can only be deferred annuities — allowing you to make payments over a long period of time with the promise of a payout in the future. Some may allow you flexibility to contribute without a schedule or minimum number of routine payments. Single premium immediate annuity (SPIA) A SPIA allows you to make a single lump-sum payment and begin collecting a steady income stream in less than 12 months. It’s also called an immediate annuity or income annuity. They account for only about 10% of annuities sold each year and are preferred by people close to retirement age.
Peace of Mind Comes From Knowing Your Money Is Protected Learn more about how annuities can help provide you with guaranteed income, regardless of market conditions.
There are a wide variety of annuities beyond the most common types. These can be tailored to your specific needs and long-term financial goals. There are options that allow you to take advantage of tax breaks for qualified retirement accounts — such as traditional IRAs and 401(k) plans. You can also set up annuities to continue payments to beneficiaries after you die. Other options include:
There are pros and cons to each type of annuity. You should consider how the features of different types of annuities work best for your current financial situation and how each can help you reach your long-term financial goals. You should also compare several different annuity options, ask yourself how each meets your needs and talk to a financial professional about how each annuity you’re considering will help you achieve your goals. Checklist for Choosing the Best Annuity for You
Understand how you’ll use the annuity. Ask yourself how you plan to use the annuity — for a guaranteed retirement income, building toward a retirement portfolio or as an inheritance for your spouse or children. Discuss these goals with a financial professional. This can make a big difference in the type of annuity best suited for you. Consider whether you’ll need the money right away. If you will need the money in the next five years, you could have to pay costly surrender fees. These fees vary from insurer to insurer, so it’s important to understand how much of a penalty you may have to pay for an early withdrawal. Ask about waivers if you may need the money right away. You may want to consider a waiver that lets you take out money right away in the event of an emergency, such as a serious medical event or the need for long-term care. Some annuities can include a waiver dropping early withdrawal — or surrender — fees for these emergencies. Know all the fees you’ll have to pay. Insurers may charge annual fees in addition to upfront fees when you first purchase your annuity. You can typically find information about fees in the prospectus. Look at the overall cost of fees in the long term and consider how much they eat into your benefits over the lifetime of the annuity. Get quotes from at least three insurers. Payout options vary from insurer to insurer. Compare annuities to get the best bargain. Consider buying multiple annuities from different companies — based on what your state regulations allow. Make sure the company is solid. Make sure you’re buying an annuity from a company that’s financially sound. If a company goes under, it could take years to get your money back. Check the company’s ratings with multiple financial rating agencies such as Standard & Poor’s, Moody’s, A.M. Best and Fitch. This will give you an idea how strong a company is. Know the minimum guaranteed return. The minimum guaranteed return is the very minimum amount of money you’ll receive each year from your annuity. This can be straightforward with a fixed annuity, but some variable annuities also guarantee a rock-bottom amount no matter what. Understand the death benefit options. A death benefit is money provided to your spouse or other heirs if you die. These options can vary. Ask about the options you have for how you want a death benefit to work with your annuity before you purchase it. Wendy Swanson, Retirement Income Certified Professional™, explains how to determine what annuity makes the most sense for you.
How are the different types of annuities determined? There are several ways to categorize annuities by type. Annuity.org categorizes the types of annuities by payout, growth and premium options. These tend to be the most common aspects of annuities that people consider important when buying an annuity. What are the main types of annuities? Payout types include immediate and deferred annuities which determine how you will receive your money from an annuity.
What is the best type of annuity product? The best type of annuity varies from person to person. The type of annuity that is best suited for you depends on your current financial situation and long-term financial goals for an annuity. It is important to compare annuities to find the one that best fits your needs and goals. You should consider how you wish to pay for an annuity, the kind of growth you want an annuity to accomplish and the type of payout that suits your financial goals.
Please seek the advice of a qualified professional before making financial decisions. Last Modified: October 13, 2022
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