By Liam Thomas
Annuities are contracts that provide guaranteed income. They are the best option for retirees who don’t want to worryabout outliving their retirement savings. With annuities, they can have a specific income stream regardless of the market’s performance. Also, annuities can be made to turn a significant lump sum into a steady cash flow. But, as the lump sum placed into an annuity is illiquid, it is not an ideal option for younger people or those who have liquidity needs. This post explores the different types of annuities, how they work, and how they benefit those who buy them.
Fixed Annuities
This type of annuities refers to a fixed interest investment that insurance companies issue. With fixed annuities, investors get paid guaranteed interest rates. A lot of retirees and pre-retirees opt for their no-cost and guaranteed investment. The money invested in a fixed annuity is expected to grow and increase in value, given that the insurance company is financially sound. The growth in value doesn’t depend on the performance of the insurance company’s investments. Fixed annuities can be equity-indexed or market-value-adjusted.
Variable Annuities
With these annuities, annuitantscan pick from different subaccounts. How the subaccounts perform determines the value of the account. Investors can buy a rider to lock in a guaranteed income stream no matter the performance of the market. Variable annuities are chosen by retirees who wish to have a shot at capital appreciation and guaranteed income for life.
Deferred Annuity
These annuities don’t pay until a future date. With them, people can increase their income stream in the future without spending a lot of money. They are attractive to those who want guaranteed income in the future or create an income they can enjoy at different periods later in their lives.
Immediate Annuities
With this annuity, the annuitant gets paid an income a timeperiod following their annuity purchase. When the income is paid monthly, the first payment is given a month following the purchase of the immediate annuity. Typically, payments are higher than other types of annuities since they include both principal and interest.
Lifetime Annuities
This form of annuity offers income for an annuitant’s remaining life. The amount paid to the person depends on their age, how much they pay into the annuity, and the interest rate determined by the insurance company. Since pure lifetime annuity stops paying when the annuitant dies, buyers add a fixed period annuity to their lifetime annuity. This combination ensures that when the annuitant dies before the end of the fixed period, their beneficiaries get the income until this period ends.
