Below we go over some of the basic types, payment schedule differences, and general options available with annuity insurance. If you would rather someone explain these differences, or if after reading you still have questions about the different types and payout schedules available, please fill in our annuity quote form and a friendly expert will be with you shortly.
The term immediate annuity relates to the payment schedule of annuity insurance. Immediate annuities start paying back the investor right away. Annuity insurance cannot begin to pay the investor back before the age of 59.5. Therefore, to be eligible for annuity payments, you must be at least that age. Payments can be for life, or for a set period of time.
The benefit of choosing this type of payout, of course, is that you start receiving payments right away. The negative, is if your annuity is providing you a good rate of return, you may not want to withdraw money out unless you have either a need to use the money right away, or an equal or better investment option (which may be hard to find, when taking the tax benefits into consideration).
The amount of money you are paid with each payment cycle depends on the type of annuity you choose, which we discuss below.
With deferred annuities, the investor does not start receiving payments for a certain length of time. That time can be months or it can be tenís of years, itís really up to you (but you must be at least 59 and one half years of age before payments are possible, without tax penalties). Usually deferred annuities are purchased by someone too young to receive payments (younger than 59.5 years of age), however people over 60 can also purchase an annuity with deferred payments. The payment type that makes sense (when youíre of age to make the decision) depends on two things:
1. Liquidity: If you have other funds, or plan on earning income through other means, than a deferred annuity may make sense. If you may need money quickly, then obviously locking up your money for a long time doesnít make sense.
2. Other investment options: Currently some low risk annuities are offering up to 8% return. In this economy, finding investments of similar security and return can be a difficult task. However, the same applies, if you have other investment alternatives of similar return and security, an immediate annuity may make more sense, than if you do not.
Deferred annuities continue to receive interest while the investor is waiting for the first payout. There is not necessarily a better option for everyone, which one makes sense for you depends on your situation (your need for liquid finances now, the alternative investments available to you, etc). The tax deferral benefits of a deferred annuity that accumulates over years before withdrawal can be massive, and that is why many people choose to purchase a deferred annuity many years before they can take money out.
Fixed Annuities come with the security people look for in a retirement investment. There are few investments that are no risk, however, this type of annuity is just about as close as you can get. It provides an ongoing fixed payment. This payment includes the premium paid by the investor, as well as interest, at a set, pre-agreed upon interest rate. Fixed annuities are similar to bank-issued CDís, but geared specifically for retirement savings. The interest rate is guaranteed by the issuer. In the event that the issuer goes bankrupt, most states guarantee investors that their premiums are secure, usually between $100k up to $500k in some states under some conditions. For more information, you can check with your state government, or simply fill in our Annuity Quote page and an expert will provide the answers.
With the current market conditions the way they are, and interest rates as low as they are, fixed annuities are a very appealing investment. They can offer a great deal of security (payouts donít fluctuate with the upís and downs of the stock market), and they are currently providing interest rates of as much as 8% (much higher than most secure investments) and they also provide tax-deferral.
With a fixed annuity, a lump sum upfront provides guaranteed ongoing payments for life, or for a set period of time at the investors choice. They can usually be purchased for as low as $5,000; they are very low risk, have more liquidity than CDs, are tax deferred and usually offer higher returns than bonds, CDs, treasuries, or other low risk investments.
Variable annuities are higher risk than fixed annuities, but they also provide the opportunity for a higher return. A Variable annuity combines the opportunity to invest in the stock market, bond market, or other securities, but gives the investor the tax deferred benefits and lifetime income offered by annuities. You have the options to choose what to invest in and how to allocate your money. Variable annuities are often more of a consideration for pre-retirement age investors, still looking to accumulate more capital, than retirees, who would like to guarantee the preservation of capital through a fixed annuity.
Simply summarized, variable annuities offer the same tax advantages as fixed annuities Ė gains are not taxed until you make a withdrawal. Unlike fixed annuities, the amount of each paycheck you receive will vary and is not guaranteed.
Also known as Equity Indexed Annuities, they are a hybrid of fixed and variable annuities. Indexed Annuities are linked to common stock market indices. They offer more risk and reward than a fixed annuity. If the index grows, so does your payout, if the index shrinks, so does your payout. However, they offer more safety than a straightforward variable annuity. If the index declines, youíre protected against losses with a modest baseline rate Ė because a stock market will (hopefully!) never hit zero. They allow you to invest in the market without risking your entire principle.