Types of Annuities
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Fixed and Variable Annuities
A fixed annuity is a type of annuity where the issuer, usually a life insurance company, guarantees both the principal and interest rate over the lifetime
of the annuity. When an individual purchases a fixed annuity, they know exactly how
much they will be paid back, at what increments, and for how long.
A variable annuity is based upon an investment in a mutual fund that is generally managed by the issuing company. Just as with a typical mutual
fund, variable annuities pay according to the performance of the investment and the payments
are not guaranteed by the company.
There are a few types of annuites that have characteristics of both fixed and variable annuities.
Equity indexed annuities are on example of this. As with a fixed annuity, they provide a guaranteed interest rate of return. However, because they are tied to
an equity portfolio like a variable annuity, they may pay a higher rate of return based upon the performance of the fund.
Special Types of Annuities
While all annuities can be classified as "fixed" or "variable," there are many types of annuity products that can fall into either one of these categories. Following
is a list of the major types of annuities on the market today.
Qualified and Non-Qualified Annuities
A qualified annuity is simply an annuity that is purchased through a tax-deferred retirement
account, such as a 401K. With qualified annuities, the purchaser is able to deduct the
premiums from their taxable income at the time of the contribution. Since these are tax deductible, they are frequently referred to as
tax sheltered annuities.
A non-qualified annuity just means that it was not purchased via a tax-deferred retirement savings program. With
non-qualified annuities, the purchaser receives no tax savings and must also pay tax
on any interest income earned.
Deferred and Immediate Annuities
With deferred annuities, the purchaser receives no payment at the time the annuity is purchased. Instead, a
deferred annuity begins to yield payments only after some time period has past, often
many years.
An immediate annuity includes payments right after the policy is purchased. In other words, when someone buys an
immediate annuity payments will be issued in the next period after it was purchased,
usually just a month later.
Lifetime and Fixed Period Annuities
With lifetime annuities, sometimes called
life annuities, the payout is made to the beneficiary until they die, no matter how long.
With a term certain annuity, on the other hand, payouts are only made for a specified period of time and then they stop. For example,
a fixed period annuity may specify that payments will be made for exactly 20 years and no
more, regardless of how long the beneficary lives.
Flexible and Single Premium Annuities
A flexible premium annuity is one that requires the purchaser to make many payments over
a period of time. These are often referred to as multi-payment annuities.
Conversely, a single pay annuity is one that requires the purchaser to make a lump sum payment at the beginning. For example, with
single premium annuities, the purchaser might be required to invest an initial
$100,000 all at once and then they would receive payments in return over the specified annuity period.
Additional Types of Annuities
There are several less-common types of annuities that are not described above. For your reference, we have included the following topics on these specialized annuity types.
Joint Annuities
Last Survivor Annuities
Pension Annuities
Private Annuity Trusts
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