Annuities

An annuity is a series of payments that are completed at equal intervals over time. An easy example are deposits of the same amount (or at least at the same time every month for an amount that is approximately similar) to a savings account. Another example are monthly mortgage payments, or even insurance and pension payments. Annuities can be classified in a myriad of ways, but the most common classifications are the timing of the payments, the contingency, the variability or the deferral of payments.

Regarding timing, payments of what are known as annuity-immediate annuities are completed at the very end of the payment periods. The interest accrues between when the annuity was issued and the first payment. With annuity-due annuities, payments are made at the beginning of every payment period which has its own advantages and disadvantages. With contingency payments, the annuities are paid under certain circumstances. This is common with life annuities which are paid over the remaining years to the annuitant. Fixed annuities are those with fixed, immovable payments, and variable annuities contain a bit more flexibility.

But enough of the types, let’s get to what you really want to know – which annuity is the right one for me?

Fixed Annuities

Like a Certificate of Deposit (CD), these are insurance products that will return the principal you’ve invested plus a fixed rate of interest. Known as a safe bet, the fixed annuity is different from a CD because it will grow tax-deferred. Perhaps the most common question that arises with fixed annuities is, “are they safe?” The answer here is a resounding yes. Now, they are not backed by the Federal Deposit Insurance Corporation (FDIC), but annuity providers (fixed) do need (per state law) to protect the annuity contracts that are outstanding with reserves in cash that match the outstanding amounts to the penny.   

Variable Annuities

Likely the most complex of all to understand, having a trusted financial advisor to guide you is recommended with variable annuities. Typically used for long-term financial planning, variable annuities are popular in their ability to serve as a method to save for your retirement and grow the savings over time. Like other annuities, the idea here is to provide a guaranteed income over your lifetime. Sounds sweet, right? You bet, as the three main benefits of a variable annuity are the previously mentioned income for life, a death benefit and a tax deferral.

Indexed Annuities

Also known as hybrid annuities, indexed annuities have been marketed as something novel, but they are basically an indexed annuity with the aim of providing income for life. Nothing more, nothing less. Also designed for long-term retirement planning, it is generally good to fully maximize your 401K, IRA or similar retirement plan before diving into indexed annuities. There are also things known as surrender fees which provides leniency in withdrawing funds, but up to a point. Again, another item for that trusty financial planner to help you with.

Annuities can be complex, but in theory they aren’t. Designed to provide income over a lifetime the mechanisms are varied, and thankfully there are some smart ladies and gentlemen out there that can show you the way.