Like Life Insurance, Annuities come in many shapes and sizes. Whereas the main goal of a life insurance policy is to secure a death benefit, the central aim of annuity is to secure a lasting source of income in retirement.
Depending on the type of annuity you purchase, you may see guaranteed returns and upside potential, even a stream of income that cannot be outlived.
Annuities can be generally broken into two categories: Deferred and Immediate.
Deferred Annuities include products such as Fixed Indexed Annuities, Traditional Fixed Annuities, and Deferred Income Annuities. These types of annuities are deferred in two senses:
- Benefit payments are delayed for a pre-determined period, during which the annuity accumulates value.
- Cash value accumulates tax-deferred, meaning that you do not face a tax-burden until distribution. This feature is particularly helpful at accumulating a larger amount of funds because gains are not taxed every year, only once benefits are triggered.
In a Fixed Indexed Annuity—sometimes known as an equity indexed annuity—the growth interest rate is tied to a specific stock market index, such as the Standard and Poors 500 or the Dow Jones Industrial. Although the interest rate is based on a stock market index, the annuity itself has no direct stock market participation.
While the growth rate can vary based on the contract’s specific index, a Fixed Indexed Annuity will typically have a minimum rate that protects the consumer if movement is negative. Fixed Indexed Annuities may appeal to individuals that desire the security an annuity provides, but also wish for upside potential.
In a Traditional Fixed Annuity, the interest annuity rate may change on annual basis, as adjusted by the insurance company. However, there will typically be an underlying guaranteed minimum interest rate for the contract. There are Multi-Year Guaranteed Annuities (MYGA) that provide a particular interest rate over a longer period of time.
A Deferred Income Annuity, sometimes referred to as longevity insurance, secures a source of income that cannot be outlived. However, unlike FAs or FIAs, it is typically purchased with a lump sum, similar to a Single Premium Immediate Annuity. But it includes a period of deferral, during which the account gathers cash value. The length of delay will impact the benefit amounts you receive.
Immediate Annuities are structured to issue benefits right away (typically within a year of purchase). These are usually purchased in a lump sum—hence the common title of Single Premium Immediate Annuity (SPIA). Your monthly benefit amounts and how long you receive benefit payments will depend on a number of factors, likes your ages at the time of purchase, your life expectancy, your purchase amount, and any elected features.
Lifetime Income Rider
Many annuity carriers offer numerous ways to customize their products to customize their products, through features and options. This could relate to how the contract credits interest, accumulates value, or how long payments last.
One common feature among annuities is a Lifetime Income Rider, which enhances the existing structure of say, a fixed indexed or traditional fix product, to pay out for the rest of an individual’s life. Other options can also provide death benefits, should the consumer die within a certain benefit period.
How Do You Know What Annuities Are Best For You
As there are many kinds of annuities, each with their own opportunities for customization, the annuity that will be right for you will depend on your specific situation. Call Family Tree Financial Group now to begin exploring your annuity options.