Annuity: What and how many types of annuity are there, know the important things before investing

Amidst the current economic uncertainty, many job retirees today need more than just Social Security and investment savings to meet their daily needs. Annuities provide a way for individuals to potentially accumulate wealth, defer taxes, preserve their principal, and ensure a reliable income stream in retirement.

What is annuity?

An annuity is a payment made by an insurance company at a specified interval. It is a contract issued by the company that converts the investor’s premium into a guaranteed, fixed income stream. More specifically, an annuity contract is a legally binding, written agreement between you and the annuity provider that issued the contract. This contract transfers the longevity risk to you. In their most basic form, annuities work by converting premiums into a stream of payments. The amount and duration of payments depend on various factors, including the type of annuity, premium amount, age of the annuitant and the payment option chosen. Annuities can be optimized for income or long-term growth, but they are not short-term investment strategies. Most annuities provide income through the process of accumulation.

Why do people buy annuities?

People usually buy annuities to help manage their income in retirement. Annuities provide three things:

1.Periodic payments for a fixed period of time. This could be for the rest of your life, or the life of your spouse or any other person.

2. If you die before you start receiving payments, the person you named as your beneficiary receives a specific payment.

3. You don’t pay any tax on your annuity income and investment gains until you withdraw the money.

How many types of annuities are there?

There are four types of annuities, fixed, variable, immediate and deferred. Here’s how they work:

fixed annuity: low risk option

Fixed annuities are probably the simplest type of annuity to understand. The insurance company pays a guaranteed fixed rate of interest on the investment for an agreed period (guarantee period). The guaranteed interest rate on your investment can apply anywhere between one year and the full duration of your guaranteed term. When your contract expires, or at the end of the guarantee period, you can choose to either annuitize your contract, renew your contract, or transfer your invested dollars to another annuity contract or retirement account. Because fixed annuities offer a guaranteed interest rate, your income is generally not affected by market volatility, so you can predict the amount of your monthly payments.

variable annuity: Potentially highest upside option

A variable annuity is a type of tax-deferred annuity contract that allows you to invest your money in sub-accounts similar to a 401(k). Sub-accounts can help keep up with annuity growth, and sometimes outpace inflation. Annuity contracts with specific riders can offer guaranteed lifetime income. Like mutual funds, sub-accounts are subject to market risk and performance. Variable annuities also provide a death benefit rider or an income rider which provides a guaranteed income to your beneficiaries. Guaranteed Lifetime Withdrawal Benefit, or GLWB, is a rider that helps protect against both longevity risk and market risk. This double protection can be beneficial if your retirement is 15 years or less.

intermediate retirement One of the trickiest elements in income planning is figuring out how long you’ll live. intermediate Annuities are specifically designed to provide immediate guaranteed lifetime payments. The drawback is that you are trading liquidity for guaranteed income. Normally you will not get access to that entire lump sum amount if you need it for an emergency. However, if securing lifelong income is a major concern, then intermediate Annuity may be the right option for you. a feature that intermediate What can make annuities so attractive is that the fees are included in the payments. This allows you to know how much money you will get in future for the rest of your life and the life of your spouse, based on the amount you originally contributed.

deferred annuity: tax-deferred option

Deferred annuities provide guaranteed income in the form of a lump sum or monthly income payments at a future date. You pay either a lump sum amount or monthly premiums to the insurer, who will invest these funds as per your contractual agreement. Depending on the investment type you choose, deferred annuities offer the possibility for the principal to grow before receiving the payouts. Deferred annuities are a great option if you want to contribute your retirement income on a tax-deferred basis – meaning you won’t be taxed on retirement income until you withdraw the money.