Types of Annuities
The first thing to know about annuities is that there are different types just as there are with other financial instruments such as mutual funds, ETF’s and other investment products. Basically, annuities fall under 3 categories, immediate, fixed, and variable. Then within each type there are many variations as to how they are structured and many different riders designed for specific objectives. Choosing the right one for you requires the guidance of a financial professional and an understanding of your objectives. We rely on today’s technology to do a better job of selecting the right annuities when it comes to comparing one against the other, whether you may be looking for safe growth or whether looking for income or a blend of both. This technology allows us to do a side by side comparison taking a look at financial strength and ratings, the opportunity for earnings, the amount of income that can be generated and consider fees, if any, and compare them against one another.
Annuities are NOT a high-risk / high-return investment, they are a product designed for people looking for a reasonable return without market risk either as earnings or to provide long term retirement income for the benefit of the owner or owner and spouse.
Immediate Annuities offer a guaranteed payout or income for a specified term or for life in exchange for a lump sum. The term can be as long as 10 or 20 years or for life and in some cases could be continued by a surviving spouse. The amount of the payout is based on the amount of a lump sum, current interest rate and the term of the payout. Immediate annuities have been one type of an annuity that can be used when creating an income plan although in today’s low interest rate market, other annuities may be better suited.
Fixed Annuities can mimic bank CDs’ as they are generally offer a fixed rate of interest for a specified period of time most commonly ranging from 3 years to 7 years. The longer the term, the higher the interest. This is a very popular place for short term money and usually outperforms bank CDs’. Fixed annuities have a triple compounding effect. For instance, with a bank CD, you will receive a 1099 at the end of each year for the interest earned; whereas with fixed annuities you don’t, as they are tax deferred. There is no tax unless you withdraw funds. This means not only do you earn interest on your principle, you earn interest on the interest itself and on the amount that would’ve been paid out as tax. Fixed annuities, in many cases, are more liquid than a CD since many of them allow for a 10% free withdraw each year without a penalty. Traditional investment funds can be held within a fixed annuity and the annuity can also be established as IRA or Roth IRA.
Indexed annuities are commonly referred to as FIA’s or fixed indexed annuities. Basically, FIA’s earn interest credits based on the performance of an outside market index such as the S&P 500. Today’s more advanced annuities are linked to new un-capped indexes which provide higher earnings opportunities. Indexed annuities, by design, offer a greater opportunity for higher earnings than a fixed annuity, treasury or bank CD based upon the performance of the specific index and a crediting formula within the contract. The important thing to remember is that you do not own the stocks or investments held within the index as you are only linked to the performance of the index, therefore, your principle and any future earnings are never subject to a loss due to a negative performance or loss within the index. This is how annuities protect your principal and earnings. FIA’s are now in higher demand due to what’s known as income riders which can be the source of guaranteed income for life as discussed under Income Planning.