Benefits of the Different Types of Annuities

For those looking to safeguard their retirement without having to directly weather the eb and flow of the stock market, investing in annuities can guarantee future income for you and—in some cases—your spouse or beneficiaries. Just like with any investment, it’s important to understand the different types of annuities along with their benefits and risks, so you can make smart portfolio decisions to secure your financial future.

What Is an Annuity?

An annuity is a contract between you, the investor, and an insurance company where you agree to invest a premium—either a single payment or multiple payments, depending on the specific annuity and company—in return for guaranteed income payments to be paid within a specified period of time or for the rest of the investor’s life.

How Does an Annuity Work to Make You Money?

According to Investopedia, the money you deposit “is invested along with the money of many other clients. Much like a mutual fund, the combined funds are invested in order to generate the returns that are used to make annuity payments.” Most annuities also have annual fees paid to the insurance company, but the level of fees depends on the insurance company and the specific type of annuity in which you invest.

For more information on fees associated with annuities, ask an independent financial advisor.

Annuities are considerably a more conservative investment tool compared to stocks and bonds, due to their guaranteed income; however, annuities are not considered liquid assets, which means once you’ve invested in an annuity, you forfeit access to that invested money, though some allow early withdrawal of investment for a hefty surrender fee. For that reason, most financial advisors often dissuade investors from having annuities make up the majority of their financial portfolio in order to safeguard their future.

It’s crucial for investors to also consider what happens to their annuity when and if they should die. If you are a solo annuitant (annuity investor), oftentimes your investment will stay with the insurance company upon your death, instead of going to your spouse or beneficiaries. Specific annuity conditions known as riders can be applied to many annuity investments that specifies to whom payments are transferred upon your death, oftentimes at additional costs. It’s common for spouses to become joint annuitants for this exact reason, so when and if one should pass, the other still collects the annuity payments.

Types of Annuity

Which annuity is right for you depends on a variety of factors, but with your unique financial goals in mind, these are two of the most important considerations when planning annuity investments:

  • What is your risk tolerance (i.e. how much risk your willing and able to take)?
  • When do you want to receive income payments?

Fixed Annuities vs. Variable Annuities

Determining whether a fixed annuity or a variable annuity is right for you ultimately boils down to your risk tolerance. Fixed annuities and variable annuities differ in the way in which you benefit from your investment.

What is a Fixed Annuity?

With a fixed annuity, the insurance company guarantees payment of your initial premium along with a fixed-interest rate. This is appealing to conservative investors who want a predictable annuity payment that won’t increase or decrease due to stock market performance.

What is a Variable Annuity?

A variable annuity implies more risk taken by the insurance company with your investment on your behalf. An insurance company’s annuity payments to you will be determined by the performance in the market. Variable annuities are great for those with a more aggressive risk tolerance, looking to benefit from potential rise in market performance. However, just as the market can rise, it can also fall, making this the riskier investment with the potential to lose some of your initial premium.

Deferred Annuities vs. Immediate Annuities

The difference between deferred annuities and immediate annuities is when an investor receives the annuity payments.

What is a Deferred Income Annuity?

A deferred income annuity ultimately delays your annuity payments until a specified future date. During this time, your investment continues to grow tax-free until the payment period begins (i.e. until your withdrawal). This is a great option for individuals looking to increase their future income and who don’t have a current need for annuity income payments.

 What is an Immediate Annuity?

An immediate annuity allows an investor to begin collecting annuity payments quickly after an investment is made. This option is ideal for individuals who want to immediately begin increasing their flow of income.

For either type of annuity, you can choose your terms of annuity payment:

  • Specified period of time payments (e.g. 10 or 20-year period)—These typically generate higher payment amounts, but you only receive them within the chosen period of time.
  • Lifetime payments—These result in lower payment amounts, but you receive them for the rest of your life.

Not Sure Which Type of Annuity Is Right for You?

With so many annuity options available to you, it can be difficult to know what annuity will best benefit your financial future. Will a fixed deferred annuity serve your unique situation and goals better than a variable immediate annuity? An experienced independent financial advisor can help you determine the specific type of annuity that is most appropriate for your investment objectives.

At Focus Financial, our investment management advisors take time to truly understand your financial and investment goals, so they can better guide you to make the best financial portfolio decisions and annuity selection you can make for your unique situation. Our financial planning professionals understand how important planning your financial portfolio is to you and can help you build a well-balanced portfolio to achieve all your financial objectives. To learn more about our investment management services, contact us today to find an independent financial advisor near you, so you can begin securing your financial future.­