An annuity is an insurance contract. Annuities can work like a bank certificate of deposit where you receive a guaranteed, fixed return on your money. In this instance, the rate of return and the time period of the annuity are both fixed. However, there are different types of annuities and different ways to receive payouts over time. This article will explain the basic types of annuities and the different payout options available.
The three basic types of annuities are the following:
Fixed Annuity – a fixed annuity is quite simple. You invest a specified amount of money at a guaranteed, fixed rate for an agreed upon period of time. It could be for a 3 or 5 year period.
Variable Annuity – These types of annuities carry greater risk due to their investment vehicles. Variable annuities, unlike fixed annuities, values can go up or down depending upon the direction of their investments. The funds in variable annuities are invested in a myriad of different investments. There are no guarantees of their future values.
Indexed Annuities – these annuities are generally a hybrid between fixed and variable annuities. Indexed annuities are tied to an index, such as the S & P 500. They generally have a limited upside in exchange for not reducing in value when the index performs poorly.
All these annuities can have riders, which can modify the basic annuity for an extra cost. For example, you may want a guaranteed death benefit that is not necessarily tied to the performance of the annuity. This can be added for an extra cost. There are several different riders that can be added.
Annuity Payout Options
An Immediate Payment Annuity begins paying out to the annuitant directly following a lump sum deposit.
A Deferred Payment Annuity does not begin payouts until a particular age that has been selected by the annuitant.
Once the annuity is “annuitized” meaning the payout period will begin there are several choices, illustrated below, for how your payments may be received.
1) You can select an amount certain for a fixed period of time. For example, you can choose to have the annuity make $1,000.00 a month payments for twenty years.
2) You could select a payment option of lifetime payout. In this situation, the payout will be greater the longer your lifespan. If you die soon after the annuitization begins the payout will be small.
3) A third option is a life with period certain. This is a hybrid option of the two above payouts. Here, you will receive a certain payout amount for life. However, if you die within a predetermined period of time it guarantees a specified payout for your beneficiary.
To learn more about annuities and how an annuity may work for you, contact FAPCO’s Financial Services Department.