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Types of Annuities

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A variable annuity is a contract between you (the annuity holder) and the insurance company (the annuity provider). The variable annuity allows you to invest in a variety of sub-accounts with the annuity provider. The value of the variable annuity depends on the performance of the investment options you choose. The investment options for a variable annuity are typically mutual funds that invest in stocks, bonds, money market instruments, or a combination of the three.

A fixed annuity is a contract between you (the annuity holder) and the insurance company (the annuity provider). With a Fixed Annuity the annuity provider agrees to pay the annuity holder a set or fixed interest rate. This ensures a guaranteed amount of growth each year. This can be for a single lump-sum contribution or multiple contributions over time. 

A fixed annuity is a type of annuity contract that provides a guaranteed rate of return on the principal amount invested and ensures a steady, predictable income stream for a specified period or for life.

Guaranteed Interest Rate

Fixed annuities offer a guaranteed interest rate for a certain period, ensuring that your principal grows at a predictable rate. This rate can be fixed for the entire term of the annuity or reset periodically.

Tax-Deferred Growth

Earnings within a fixed annuity grow tax-deferred, meaning you don’t pay taxes on the gains until you withdraw the money.

Safety and Security

Fixed annuities are considered low-risk because they offer guaranteed returns and principal protection, making them attractive to conservative investors.

An immediate annuity is a financial product designed to provide a guaranteed stream of income that starts almost immediately after a lump-sum deposit.

Immediate Income

  • Payment Start: Payments typically begin within one year of the initial deposit, often as soon as the next month.
  • Lump-Sum Premium: The annuity is purchased with a single lump-sum payment.

Guaranteed Payments

  • Fixed Payments: Immediate annuities can offer fixed payments (providing a stable, predictable income).
  • Payout Period: Payments can be structured to last for a specific period (e.g., 10 or 20 years) or for the lifetime of the annuitant (the person receiving the payments).

Life Annuity: Payments continue for the lifetime of the annuitant. If the annuitant lives longer than expected, the payments continue, providing longevity protection.

Period Certain: Payments are guaranteed for a specific period, such as 10 or 20 years. If the annuitant dies before the end of the period, payments continue to the beneficiary for the remaining term.

Life with Period Certain: Combines both life and period certain features. Payments continue for life, but if the annuitant dies within the specified period, payments continue to the beneficiary for the remaining term.

Joint and Survivor: Payments continue for the lives of two individuals, typically spouses. Payments may be reduced upon the death of the first annuitant.

A deferred annuity is a type of annuity contract that allows you to accumulate funds over a period of time before receiving payouts at a future date, typically during retirement. Deferred annuities provide tax-deferred growth on the invested funds and offer a variety of payout options once the annuitization phase begins.

Some of the key features of deferred annuities include:

Accumulation Phase

During this phase, you contribute money to the annuity, either through a lump sum or a series of payments. The funds grow on a tax-deferred basis until you choose to start receiving income payments.

Payout Phase

This phase begins when you annuitize the contract, and start to receive periodic payments. You can choose from various payout options, such as a lump sum, fixed-period payments, or lifetime income.

Tax-Deferred Growth

Earnings within a deferred annuity grow tax-deferred, meaning you do not pay taxes on the gains until you start withdrawing funds.

An indexed annuity, also known as a fixed indexed annuity, is a type of annuity contract that provides a return based on the performance of a specific market index, such as the S&P 500, while also offering principal protection. Indexed annuities combine features of both fixed and variable annuities, offering the potential for higher returns than fixed annuities but with less risk than variable annuities.

The key features of an indexed annuity include:

Market Index Linkage

Returns are linked to the performance of a specific market index (e.g., S&P 500). However, you are not directly invested in the index itself.

Principal Protection

Your principal is protected against market losses. Even if the index performs poorly, you will not lose your initial deposit.

Participation Rate

This determines the percentage of the index gain that is credited to your annuity. For example, if the index increases by 10% and your participation rate is 80%, you would receive an 8% return.

Caps and Floors

Cap: The maximum rate of interest you can earn in a given period. For instance, if the cap is 6%, and the index increases by 10%, you will only receive a 6% return.

Floor: The minimum rate of return, often set at 0%, ensures that you do not lose money due to negative index performance.

Tax-Deferred Growth

Earnings grow tax-deferred, meaning you do not pay taxes on the gains until you withdraw the money.

Surrender Period and Charges

Like other annuities, indexed annuities have a surrender period during which early withdrawals are subject to penalties.

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