There are different types of annuities. These different types are defined by what type of premium payment the annuity accepts, how the money grows in the annuity while it’s held by the insurance company, and how the money in the annuity is paid back to you. The key types to understand are below.
Fixed
In a “fixed annuity,” the insurance company guarantees the money invested and locks in a rate of return for a fixed period of time.
- While generally that rate can change somewhat year to year, it’s much less volatile and not tied to stock market fluctuations. The insurance company guarantees a minimum rate of interest. Fixed annuities are intended for conservative investors who want assurances as to the security of their principal. Annuities are long term in nature and the advantage of tax deferral may not be significant for time periods less than 10 years. Many annuities assess surrender charges on distributions taken the first 5-7 years the policy is in force.
- Guarantees are based on the claims paying ability of the insurer.
Variable
Variable annuities are similar to fixed annuities in that they are long term in nature, guarantees are based on the claims paying ability of the insurer, and that many assess surrender charges. However, they differ greatly in that there is no guaranteed rate of return. Variable annuities offer a choice of investment options, known as subaccounts, which vary by product. These investment options allow an owner to invest in both the bond and equity markets. The owner, along with his or her financial representative, determines an investment strategy to choose the appropriate mix of investment options to help meet the owner’s individual goals, investment objectives, and risk tolerance. The owner’s premium is allocated among the subaccounts and managed by investment professionals. Returns on the investment are variable, based on the prices of the underlying securities in the subaccounts as they rise and fall. While the insurance company doesn’t guarantee a payment amount or level of growth, the potential for growth – as with any equity-based investment – is greater than with a fixed annuity.
Variable annuities are subject to investment risk, including possible loss of principal. Due to fluctuating market conditions, at the time of distribution, your annuity value may be more or less than the total of all premium payments.
Variable annuity costs generally include a mortality and expense risk fee, administrative charge, annual contract fee, and subaccount charge.
Deferred / Immediate
Annuities are either deferred or immediate. Deferred annuities are those that are established to have payments “deferred” until some future date. With an “immediate” annuity payments must begin to the “annuitant” (the person on whose life expectancy the contract is based) within 12 months of establishing the policy. Payment options can generally be structured for various lengths of time or for life, however they may vary by product.
Single / Flexible Premium
Single Premium
A single premium annuity is one that’s funded by one payment made at the time of purchase. Once the policy goes into effect, you cannot make any additional premium payments.
Flexible Premium
With a flexible premium annuity, the amounts you pay into your annuity can change to meet your needs. You can make additional payments according to the conditions set forth in the policy.
