What Are the Types of Annuities

Are you planning to save for retirement and came across a term called annuities? Or maybe you are already familiar with the term but do not know which type of annuity may suit your personal needs.  In either of the above cases, you are in the right place. This post will give you brief information about what annuities are, along with valuable insights into some of the most popular types of annuities. 

Defining Annuities

An annuity is a long-term contract that can help you grow your retirement income. An insurance provider designs an annuity contract for you to invest money into to reap the gains for years to come. You can either accumulate your profits or opt to receive payments at regular intervals. 

Benefits of Annuities

There are several financial and personal advantages you can reap from annuities.

Here are some of the main benefits:

• Savings – Annuities offer you alternate means to save your hard-earned money. You can save an additional amount of money on top of what you save for retirement. This is an excellent opportunity if you have already utilized other tax favoring investments.

• Making Up for Lost Time – in case you started late when it comes to retirement saving, annuities will allow you to catch up on the lost time.

• Offering potential to grow – thanks to annuities, you can now enjoy tax-deferred growth and a lifelong income stream.

How Does an Annuity Work

An annuity is a form of long-term investment that allows you to protect your money and protect yourself from running out of savings after retirement. Annuitization allows you to convert your investment into regular payments that can last for as long as you live. 

The best part is that nationwide annuities are mostly flexible, and you can opt for one that suits your needs. You can invest over a certain period of time in small sum or make a lump sum investment. You start receiving payments straight away or at a later date, depending on the type of annuity you pick. 

There are various types of annuities that you will learn about in detail later in this post. That said, you must remember that any investment in any form involves risk, and you may lose the value of the i

nvestment at any time.

All protections and guarantees are subject to the insurance company’s claims-paying abilities. However, such protections do not apply to your variable accounts that are subject to potential loss of principal or investment risk. 

5 Types of Annuities

You can structure your personal annuity based on several factors and details. This includes the duration you wish to receive the p

ayments from 

your investment. However, these payments will only continue until you or your spouse or any other elected beneficiary is alive. 

Moreover, annuities can also pay out funds for a fixed duration of time. For example, for 10 or 20 years, depending on how lo

ng you (as an annuitant) live. You can buy an annuity offering deferred payments or immediate payments depending on your personal goals and needs. 

That said, let us dive a little deeper and explore five common types of annuities. 

Fixed Annuity

A fixed annuity refers to an insurance plan that offers you a guarantee to receive a fixed interest rate on your contributions to

wards the annuity plan for a certain period of time. This type of annuities comes with a lower risk factor than other counterparts. Therefore, you can have peace of mind with a steady income stream after retirement. 

A fixed annuity can offer deferr

ed as well as immediate returns depending on your contract. You can even start receiving payments with 12 months of buying a fixed annuity. In other cases, you can also opt to receive the annuity payments at a later date. That said, deferred annuities generally start paying once you have retired. 

Pros 

• A Fixed annuity is very simple in nature when it comes to determining the sum you will receive as income payments. 
• You do not have to worry about any last-minute shocks because everything is predetermined in a fixed annuity agreement. You will never have to worry about your money in case the stocks you invested in underperform. If you are a retiree already, this can be helpful as you cannot afford to lose your savings. 

Cons

• There are no frills, i.e., you get a fixed yield without any potential of receiving greater interest rates. 
• You do not have any protection against inflations. This means your overall value of the investment may decrease over time. 
• Just like ordinary income, you will pay tax on the money withdrawn from your fixed annuities. 
• If you withdraw money prior to reaching the age of 59 ½, you will have to pay a 10 percent penalty for early withdrawals.
• In case you want to withdraw your money because you do not like the interest rates after they reset, you will have to incur penalties.

Variable Annuity

In a variable annuity, your value ties to the performance of your investment portfolio. The payments received in variable annuities are subject to increase if your portfolio performs well. However, you may also end up losing money if your portfolio underperforms. 

Variable annuities are popular for offering increased possibilities for higher returns than other counterparts; however, this payout does not come with a guarantee.  You can have your annuity customized to your personal needs and how much risk are you willing to take. 

That said, you can either choose to receive an income stream until you die or for a certain period of time. You can also allocate the money you invest to a predetermined portfolio. These portfolios come in a variety with various risk tolerance levels, investment goals, and timelines. You can pick one that fits your need and financial range. 

Remember that the income you receive will increase or decrease depending on how your portfolio performs. Typically, the annuity company will guarantee a return of premium (ROP), meaning you will not lose the initial investment amount. 

In case your portfolio does not do well, you will not earn profits, but if it does perform well, you will receive more significant gains. 

There are two phases in a variable annuity:

• Accumulation Phase – your contract value can increase during this phase. You make a contribution or deposit to buy the annuity and specify your preference to invest the funds. The interest rate you receive my change, but there will be a certain minimum interest rate guaranteed.
• Payout Phase – This is also referred to as the distribution phase of the annuity. You can receive the funds as well as profits as a stream or as a lump sum payment. You can also decide how long you want the payments to last. This can be for a number of years or indefinitely till you pass away.

Pros

• In case your portfolio performs well, you will receive an increased payment and keep up with the inflation. 
• There are no taxes on your earnings until you withdraw the money from the annuity.
• The annuity company will provide a guarantee that you can access your money whenever you want.

  This applies even if you have do not make any interest on your initial investment. 

• You can nominate a beneficiary to receive the payments in case of your death.

Cons

• There are no guarantees to earn potential interest on your investment. This is directly correlated to your investment portfolio and will affect your annuities value in case of poor performance. 
• You will pay taxes just like regular income when withdrawing the money.
• Withdraw your money fully or partially earlier than your contract terms will cost you withdrawal or surrender charges. You may end up paying up to 10 percent in the case you withdraw the money earlier. 
• You will pay charges to ensure guaranteed earning for life. This can be up to 1.2 percent or more per annum.

Indexed Annuity

Indexed annuity refers to fixed-index annuity tying your income payments in with a stock index. The performance of indexed annuity is dependent on financial markets. This means if the market performs well, so will your annuity or vice versa. You can say that indexed annuity is a hybrid of variable and fixed annuities. 

However, it comes with a guarantee of minimum returns on your investment. Typically buying an indexed annuity will guarantee you to receive a minimum of your principal back. On top of that, you will so receive an interest of between 1 and 3 percent. This may increase if your investment portfolio performs well. 

Pros

• As your yield may increase with better market performance, this may offer you a cushion against inflation.
• You do not lose money in case the stock market underperforms. 
• Locked in index gains.
• May offer better interest rates than other certificates of deposits.

Cons

• There is a cap on your gains, and it will reflect the full increase in your stocks’ value.
• Higher expenses and fees may reduce your gains.
• Higher sales commissions.
• The percentage of gains you receive may decrease. Plus, your cap may reduce with passing years. 
• Expensive charges to withdraw your money.

Bonus Annuity

A bonus annuity refers to a contract that offers you either a bonus on a first-year interest rate or an upfront premium bonus. The upfront premium bonus usually comes with a fixed-indexed annuity. In comparison, a first-year interest rate bonus is a part of a traditional fixed annuity. Let us have a brief look at both of them. 

• Upfront premium bonus – where the annuity company pays you a lump sum amount based on a certain percentage of your initial deposit. This is also applicable every time you make an additional fund payment. 
• Bonus on First-Year Interest Rate offers a fixed
  percentage of the additional interest rate you will receive on your base interest rate at the end of your first year. This interest crediting rate reduces in the subsequent years coming down to traditional non-bonus base interest rates.

Pros

• Bonus annuity can help you make up for a time if you started late on retirement investment planning.
• After 59 ½ years of age, federal taxation is not applicable.

Cons

• The surrender period for a bonus annuity may be longer than a traditional annuity.

This allows your insurance carrier to make up for all the extra bonuses they paid you.

The Long Term Care Annuity

The Long Term Care or LTC annuity refers to a type of deferred fixed annuity. This is a hybrid annuity designed to offer you help to pay for long term care goals. The idea is to bear your care costs and not destroying your savings. 

LTC annuity is a long-term care insurance type. You can use this to pay for assisted living, nursing home expenses, chronic illness, home healthcare services, and other terminal illness expenses. 

The basic LTC annuity offers you enhanced care coverage, and the best part is that it is all tax-free. There is a very minimal underwriting process without any medical examination. 

Basically, it is an alternative to conventional long-term healthcare insurance. It doubles or triples the initial single premium amount you receive based on your medical records. This is the best way to generate long-term but tax-free healthcare insurance benefits. 

According to Pension Protection Act,
you can choose a qualified facility or service for care whenever you feel ready. You will reap the benefits via continuous reimbursement over a certain period of time. This also means that you will have to pay all the costs upfront and later sent invoices to the insurance provider. They will then pay you in the form of a monthly allowance.

If there is any money left after your demise, your elected beneficiary will inherit that amount.

The benefits of LTC annuity are:

• Growth potential
• Protection on your principal amount
• Tax-free LTC benefits
• Tax-deferred growth

Which Annuity is Right for You?

If you are wondering which annuity is the right fit for you, then start by defining the goals you wish to achieve. However, you will never have to worry about running out of your savings. Annuities, no matter which type you choose, combine all the characteristics of insurance with investment features. 

This can help you guarantee a reliable income stream without worrying about outliving it. Some annuities can help reduce the risk associated with the investment market. Therefore, you can invest with peace of mind.