The Different Types of Annuities: Explained

Share via

The whole point of an annuity is to provide the investor with a steady stream of income in retirement. This can be done by either providing guaranteed income for life or an amount that increases periodically, such as annually. However, annuities are complicated and not always right for everyone! Continue reading if you want to learn more about how they work and whether or not you should get one yourself.

What to Look for In a Good Annuity

There are many things to look for when deciding on what type of annuity might be best for you. Be sure that you fully understand how it works and what benefits or drawbacks come with different types of contracts. If you don’t fully understand annuities, maybe you should visit to learn more about them from the professionals in the industry. It is also important to keep in mind that some annuities are complicated and may not be for everyone.

No matter what type of annuity you choose, it is important to make sure that the company offering the contract has a good reputation. If they do not, then there is more of a chance that you could end up losing money.

Not every company is the same and just because they are offering an annuity does not mean that it will be the best fit for you. It is important that you do your research before signing any contracts so that you can find a company whose product line best fits your individual needs.

If you are not sure what type of annuity may be right for you, it might be helpful to compare different options and decide which one is best once you have all the relevant information.

Fixed Annuities

With a fixed annuity, the investor receives a specific return on his initial payment. This amount does not change during the course of the annuity’s duration. For example, an investor deposits $10,000 into a fixed annuity that pays 5% annually for 30 years. The total return on this investment would be $30,000.

  • Advantages: This type of annuity offers the safest return to the investor because they will think and grow rich in their initial deposit even in a bad market.
  • Disadvantages: There is no flexibility at all with fixed annuities, and an investor cannot access the money until the term of the annuity has ended.

Variable Annuities

The variability of this type of annuity is its greatest strength and weakness. A variable annuity offers both growth and protection. However, there are more risks involved this time around because not all investments perform well and some may not even make money. With a variable annuity, the initial deposit is further divided into different types of investment, such as stocks and bonds. The returns on these investments vary and the investor has the option to withdraw his money prior to the end of the term for a penalty fee.

  • Advantages: There are more investment options with variable annuities, which can be good for the investor who likes to diversify.
  • Disadvantages: With even more risk this time around, there are more chances that an investor could lose money. Another disadvantage is that investors cannot withdraw their funds before the term of the annuity is finished.

Indexed Annuities

This type of annuity offers growth fluctuating with the performance of a particular financial index. If an investor deposits $10,000 into this type of annuity and the market performs well, he will earn more money. But if it doesn’t perform well, his earnings may decrease.

  • Advantages: The returns of this type of annuity are not tied to a specific investment. That means there is a higher return potential for the investor, but also more risk.
  • Disadvantages: These annuities can be complicated and an investor may have to pay high administrative fees.

Immediate Annuities

An immediate annuity is different from the other types of annuities due to the fact that an investor receives his money back in a lump sum upon purchase. These are extremely useful for someone who wants to plan for retirement but does not have any savings yet. On the other hand, this means that there is no growth with the initial deposit.

  • Advantages: Even though an investor will not see much in terms of returns from this type of annuity, he will have the security of knowing that he will have a steady stream of income for life when he retires.
  • Disadvantages: An immediate annuity would be a good option for someone who has no other savings but due to its inflexibility it may not be right for everyone.

Variable Immediate Annuities

With this type of annuity, the investor receives his initial deposit in one payment. This amount is then placed in an investment vehicle. The return of this type of annuity is based on the performance of that investment vehicle and how it fares against inflation.

  • Advantages: This type of annuity offers an investor more potential to profit since he can withdraw his money at any time.
  • Disadvantages: There is a chance that an investor could end up losing money in this type of annuity, especially if he withdraws his initial deposit.

Life Annuities

A life annuity offers the highest return to the investor because it will pay out a set amount for a certain length of time. For example, an investor may receive $1,000 for the next 20 years. When that term is over, he will not be paid anything more.

  • Advantages: This type of annuity offers investors security because they can predict how much money they will make off of the initial deposit and there are no penalties for withdrawing the funds prior to the end of the term.
  • Disadvantages: Life annuities are helpful for someone who does not want to worry about his money again but because it will not provide a return on his initial deposit, this type of annuity is only a good idea if you have enough saved up for your personal needs.

Joint Life Annuities

Like a life annuity, the payouts from this type of contract are guaranteed for a specific period of time. There is one main difference between these and life annuities and it has to do with who will receive the payout once the term is up. With joint life annuities, the money will be paid out to both investors for the remainder of their lives.

  • Advantages: The biggest advantage of a joint-life annuity is that it provides a steady income to two people rather than just one investor.
  • Disadvantages: Like a life annuity, this type of contract does not provide the initial deposit in return like other types of annuities.

Annuities can be a great asset in certain situations and knowing their history and how they work can be helpful when making an informed decision. There are many different types of annuities and this article has provided a description of each to help you make the best decision for your financial future.