Types of Annuities

An immediate annuity turns premiums into a series of income payments from an insurance company that begin within a year after you buy it. You decide how often (monthly, quarterly, or annually) and how long (over a set number of years or for as long as you live) you receive payouts. People usually buy this type of annuity with money from the sale of a home or business, life insurance benefits, or a savings account. Retirees also may use some of the money they have in a retirement plan—such as a 401(k) or IRA—to purchase an individual retirement annuity.

A deferred annuity allows savings to grow tax-deferred until payouts begin. You can use a deferred annuity as a way to save for the future and for income after retirement. People who are years away from retirement—or are retired and have assets but don’t need income right away—might choose this type of annuity.

In a deferred annuity, the period of time before you begin receiving payouts is called the accumulation phase. There are different types of deferred annuities that let you decide how your money grows during this time (accumulation options). The different types are fixed, index, or variable annuities.

• A fixed annuity earns interest at a rate that is guaranteed for a set period of time. This time period is defined in the contract and ranges from one to five years or even longer. After that period of time ends, a new rate may take effect or the old rate may be offered again. The contract guarantees a minimum accumulation rate. The new interest rate will never be less than the minimum rate.
• An index annuity is a type of fixed annuity and is sometimes called a fixed index annuity. With an index annuity, earnings accumulate at a rate based on a formula linked to the change in one or more published equity-based indexes. An example is Standard & Poor’s 500 Composite Stock Price Index, which tracks the performance of the 500 largest publicly traded securities. The index and the formula that determines how the index is used to calculate your rate can vary from annuity to annuity. An index annuity contract also may guarantee a minimum accumulation value.
• With a variable annuity, an insurance company puts your money in subaccounts that are invested in stocks and bonds. The type of funds you select depends on the level of risk you’re willing to take. For each investment available, the annuity prospectus—which is required by law to be given to potential buys—outlines the objectives, level of risk, and operative expenses. The prospectus also includes the investment’s financial statements. In some instances, variable annuities can present a higher risk than other forms of annuities. The risk primarily depends on the performance of the investment options you choose; some of your investment choices might result in a drop in your annuity’s account value. A financial services professional can help you determine your threshold for risk and help select the appropriate investments.

Publications and Resources

A Woman's Guide to Annuities. Retirement tends to be a bigger challenge for women: lower lifetime earnings equal lower retirement income. Women also live longer than men and must make income last for a longer period of time. Annuities may help women overcome retirement obstacles.

The Individual Annuity: A Resource In Your Retirement. This guide has been prepared to help retirees understand what an individual annuity contract is, what options are available, and how the right choice might enhance retirement security.

Individual Annuities: Purchasing Tips. An annuity is a long-term financial contract. You should enter into an the annuity arrangement only after a thorough review of your personal finances and retirement goals. To help you better understand what to consider before purchasing, review these tips.