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What are the Different Types of Annuities?

While an annuity is essentially an agreement between an individual and an insurance company that offers guaranteed income over time, there are a number of different types of annuities to learn more about before determining which is best for you and your financial situation. What are the different types of annuities?

There are essentially five major categories of annuities—fixed annuities, variable annuities, fixed index annuities, immediate annuities, and deferred annuities. Each option has advantages and disadvantages associated with them. As such, the best annuity option for you will depend on the specifics associated with each type of annuity listed below.

Fixed Annuity

Fixed annuities pay guaranteed rates of interest that are typically higher than most bank’s CDs. But unlike a CD, you can defer your income or draw income from it immediately. These can be great for retirees and pre-retirees who are looking for a modest, no-cost, guaranteed fixed investment.

Variable Annuity

Variable annuities allow you to invest in a number of mutual funds. Account performance is attributed directly to the performance of the mutual fund, which is affected by market forces. These are excellent options for those who want the chance to appreciate their remaining lifetime income. A rider can be purchased to lock in a more guaranteed income stream regardless of how the market is performing—this could be very important if the mutual fund is performing poorly.

Fixed-Indexed Annuity

Fixed-indexed annuities are essentially fixed annuities, but with a variable rate of interest that is added to your contract value if it’s underlying market index is positive. As such, they typically offer, at minimum, a modest, guaranteed income with the chance of principal gain if their underlying market-based index is in the positive. These tend to appeal to retirees and pre-retirees who want to safely participate in possible market appreciation with no risk to their principal.

Immediate Annuity

An immediate annuity is paid via lump sum rather than by making standard premium payments. It can be set to pay out over the remainder of your retirement or over a specific period of time (these normally start at around 12 months in length). Payments from immediate annuities are typically higher because they include your principal, as well as the earned interest. Those interested in a larger stream of income and who are comfortable with sacrificing principal upfront may enjoy this option.

Deferred Annuity

A deferred annuity delays payments until sometime in the future (typically longer than one year). This allows people to make more at a future date while investing a relatively smaller amount. These can be ideal for individuals who are looking for guaranteed income later in life rather than now—or for individuals who are looking to structure numerous payment periods across different periods of their life.

If you’re not sure which option is best for you, contact The Direct Effect today. We pride ourselves on helping individuals and families find the best retirement annuity for their unique situation.