What Are The Different Types of Annuities
An annuity is a series of payments at a fixed interval guaranteed for a particular set of years or a lifetime for one or more individuals.
Similar to a pension, money is paid out of an insurance contract under which the annuitant pays a lump sum premium or multiple premium payments over a period of time. An annuity is guaranteed and backed by an insurance company. The amount paid back is a combination of your principal amount and interest earned , and part of the payments may be tax-free. Payments received from an annuity are similar to payments received from a pension. You can create your own guaranteed pension using different annuity planning strategies.
In exchange for contributing a premium amount to an annuity, an insurance company promises to do the following things for the annuitant,
- Provide an income for a period certain or for a lifetime
- Provide for safe accumulation and asset growth
- Provide a death benefit
Types of Annuities-
There are generally four types of annuities which are explained in more detail below:
1. Immediate Annuities:
These annuities pay a guaranteed stream of income for a period certain, such as ten years or for a lifetime. If you die prematurely, depending on the period chosen, your money may not go to your beneficiaries. With this type of annuity you lose control of your money and cannot make changes once it is in place. They have a very limited space in your financial portfolio but can be used to help complement a comprehensive plan.
2. Fixed Annuities:
These annuities work similar to a CD you get from a bank. They pay a fixed rate of interest for a fixed period of time. The fixed time-frame can be 3-7 years with interest guaranteed during that time. You will typically earn more than the interest earned from a CD. These types of annuities are mostly preferred by retirees and pre-retirees who want a fixed rate of interest at no cost. Again you lose control of your money and cannot change the terms once the annuity is in force. There are penalties to withdrawal your money early.
3. Variable Annuities:
With these types of annuities, the growth of the annuity varies according to the performance of the sub-accounts that your money is allocated to. These sub-accounts are directly invested in the stock market and experience the same volatility. You will see you annuity fluctuate up and down with the market. These annuities are known to have high fees associated with them as well as hidden fees an investor me not be aware of. We can provide a free fee analysis if you have one of these annuities to educate on what you have. We typically don't advise our clients to be in variable annuities as there are better options to achieve the same results.
4. Fixed Indexed Annuities:
These annuities may also be referred to as Hybrid Annuities, NextGen Annuities or Income Annuities. These annuities combine the features of a fixed annuity with the growth potential of a variable annuity. Index annuities use an index such as the S&P 500 or a number of other global indexes. Using caps and spreads, the annuitant will participate in market gains, but like a fixed annuity, their account will never go down. There are no fees for these annuities and you can change your index allocation each year. These types of annuities are preferred by retirees and pre-retirees who want to participate in the market but want to keep their principal amount safe and sound.
Additional features available with fixed indexed annuities are explained below:
- Guaranteed Lifetime Income Rider: For a small fee, usually less than 1%, you can guarantee a stream of income you cannot outlive. Some companies will double your annual income payout to cover Long-Term Care needs, if needed.
- Guaranteed Death Benefit: For a small fee, the annuity will guarantee a rate of return to guarantee a death benefit in the future to provide a legacy for your family even if we experience a down market.
- Gains locked in: Each year your gains are locked in and cannot go down from there. Some annuities allow you to watch your account daily and lock in a high mark once each contract anniversary.
Annuities can be a fantastic way to protect your financial plan from uncertainty, provide safe and guaranteed growth, guaranteed income for life and an additional Long-Term care benefit to help supplement other insurance you may have in place.
There is very little risk with annuities. There are trade-off for the guarantee of not losing your principal if the market declines and providing guaranteed income for life.
An income annuity will transfer all these risks to the insurance company. The income you receive will be immune to bond defaults, resistant to stock market crashes and can last as long as you live. They are also creditor proof and avoid probate if properly structured.
You should always buy an annuity from an independent agent like Palm Beach Tax Group. They have access to the top insurance companies and can find the perfect annuity for your unique needs and desires. Palm Beach Tax Group also has access to propriety strategies to guarantee that you will receive the highest guaranteed income as long as you live.
For a free Retirement Analyzer, 42-point Fee Analysis or a risk and stress test of your current portfolio, contact Palm Beach Tax Group at http://www.palmbeachtaxgroup.com/