WHAT IS AN IMMEDIATE ANNUITY?
As the name suggests, an immediate annuity can give you an immediate income. It does not grow or accumulate money in the investment vehicle, rather, this is the place where you put the money after it grows. When you choose to roll over a sum of money into an immediate annuity, you typically annuitize that sum of money. This means you make a tradeoff: in exchange for access to that money, you may get a guaranteed income payment. That income payment can be set for a certain period of years (term certain) or it can be set for the rest of your life (life option). Pros: Typically speaking, an immediate annuity can offer some of the highest payment terms for the lowest fees and initial investment amount. The income is guaranteed to be paid out every month; guarantees are based on the claims-paying ability of the insurance company. Immediate annuities can also be guaranteed to provide an income for a single life, or for both yourself and your spouse (ask for a joint-life option). Another benefit is you can set the annuity to payout for a certain period of time, say 20 years, after which any money left over in the account will go to your beneficiaries. Cons: Although simple and cheap, the immediate annuity is not flexible with its terms. It typically does not allow you to access your money: once the lump sum is put into an immediate annuity, the only way to access that money is through the income withdrawals. Biggest Mistake: If you are married and you want your spouse to continue receiving the income payment, make sure you understand the difference between and the primary beneficiary and the joint-life option. If your spouse is listed as the primary beneficiary on the account, they may or may not receive the leftover money upon your death. Selecting the joint-life option means the same regular payments would continue as before, for the rest of your spouse’s life.WHAT IS A DEFERRED ANNUITY?
As the name suggests, a deferred annuity puts off or postpones the income payout. A typical deferral period is usually 10 years, though it can be more or less. During that time, the deferred annuity is said to be in its accumulation phase. This is when the annuity grows with the goal of additional earnings for additional income. This is also where things get complicated. There are two main types of deferred annuities, and they are named based on the way they each grow the money during the accumulation phase.- A variable annuity grows the money using variable investments that can fluctuate in value, going up or down with the market.
- A fixed-indexed annuity grows the money in a fixed type of account with principal guarantees, earning returns that are based on the performance of a stock market index, such as the S&P 500.