What are the different types of annuities?
All annuities are financial products that allow their owners to save and grow money that might be used as income in the future. Because people may have different financial goals, financial institutions have developed different kinds of annuities. In order to learn more, consider this brief summary of the different annuity types.
Different Types of Annuities
All annuities offer tax-free growth and are considered a way to save and grow money to use as income. Most annuity advisors will group annuities into two basic kinds that can serve different kinds of savers:
- A deferred annuity allows you to make contributions years before you plan to take any income out. You might make an initial contribution and periodic contributions after that to grow your nest egg over time. People might use this product to help with advance, long-term planning for retirement, college costs, and other similar needs.
- With an immediate annuity, you might begin withdrawing income soon after you make a lump-sum contribution. Very often, people who are already retired use this kind of financial product to turn their savings into retirement income. The amount of money you can withdraw may depend upon the terms, the value of your account, and life expectancy.
Fixed Vs. Variable Annuities
Beyond these two distinct types, it’s also important to make a distinction between fixed and variable annuities:
- Fixed annuities: Fixed annuities will guarantee a return even if stocks, bonds, or other bank interest rates decline. The simplest fixed annuities offer a fixed return rate.
- Variable annuities: Variable annuities don’t guarantee growth but might offer more potential growth. The value of investments, like stocks, bonds, money markets, or funds, within the account determines the account’s value.
Sometimes also called indexed annuities, equity annuities are a kind of fixed annuity. Instead of offering a fixed return, the returns are pegged to a market index, like the S&P 500. When the market rises, owners may have a chance to earn better returns. Typically, equity annuities also guarantee that the owner won’t lose money during down years, and some of these products offer a guaranteed rate of one to three percent when the market declines.
Because it’s tough to predict lifespan or expenses, some people may use some percentage of their savings to purchase a longevity annuity at retirement. This deferred annuity can continue to grow while the owner uses other sources of retirement savings or interest. This product acts as a sort of insurance policy against outliving savings or having unusual expenses.
Before you purchase a certain type of annuity, it’s usually prudent to try to anticipate income requirements, risk tolerance, and products available on the market.
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