An annuity is a contract you enter into with an insurance company to provide a guaranteed income in exchange for a payment or series of payments. Annuities are most often bought for retirement income, and can pay an income that lasts as long as you live. As with other types of insurance and investments, there are a variety of products available.
The Different Types of Annuities
There are several types of annuities, all of which carry varying levels of risk and guarantees. To get the most out of an annuity, it’s important to know the different options available to you, as well as the benefits each type provides.
- Single Premium Annuity – You make a single premium payment to the insurance company.
- Multiple Premium Annuity – You make multiple premium payments to the insurance company.
- Immediate Annuity – You begin receiving income payments no later than one year after you pay the premium.
- Deferred Annuity – You begin receiving income payments many years later.
- Fixed Annuity – Your money, less any applicable charges, earns interest at rates set by the insurance company or in a way the annuity contract specifies.
- Variable Annuity – The insurance company invests your money, less any applicable charges, into a separate account based upon the level of risk you want to take. The money can be invested in stocks, bonds, or other investments. If the fund does not do well, you may lose some or all of your investment.
- Equity-Indexed Annuity – A variation of a fixed annuity in which the interest rate is based on an outside index, such as a stock market index. The annuity pays a base return, but it may be higher if the index increases.
Finding the Right Annuity for You
To decide which type of annuity to purchase, think about your financial goals for the future, specifically around retirement. Analyze the amount of money you are willing to invest in an annuity, and how much of a monetary risk you’re willing to take. When determining whether an annuity would benefit you, ask yourself these questions:
- How much retirement income will I need in addition to what I’ll receive from Social Security and my pension plan?
- Will I need additional income for family members or loved ones?
- How long do I plan on leaving money in the annuity?
- When do I plan on needing income payments?
- Will the annuity allow me to gain access to the money when I need it?
- How much risk am I comfortable with?
- Do I want a fixed annuity with a guaranteed interest rate and little or no risk of losing the principal?
- Do I want a variable annuity with the potential for higher earnings that aren’t guaranteed and the possible risk of losing the principal?
- Am I somewhere in between and willing to take some risks with an equity-indexed annuity?
A Special Warning to Senior Citizens
Annuity sales to senior citizens have significantly increased in recent years. Unfortunately, as annuity sales have risen, so have questionable or deceptive practices used by companies and agents looking to take advantage of uninformed consumers. It is extremely important, when considering whether or not to buy an annuity, to take the necessary precautions so you can make an informed decision. Read tips about purchasing annuities.