Types of Annuities
An annuity is a contract with an insurance company that is funded by the purchaser and designed to generate an income stream in retirement. It is a flexible financial vehicle that can help protect against the risk of living a long time because it provides an option for a lifetime income.
Two advantages of annuities are that the funds accumulate tax deferred and they can be distributed in a variety of ways to the contract owner.
There are many different types of annuities. Immediate annuities are designed to provide income right away, whereas deferred annuities are designed for long-term accumulation. Some annuities offer a guaranteed rate of interest, whereas others do not.
A Single Premium Immediate Annuity (SPIA) is an annuity that can help you get a guaranteed and reliable stream of income. You can purchase a SPIA with a lump sum of money and it can start paying out immediately or within the year. With this type of income annuity, you can choose to get guaranteed payments for life, for a set guaranteed period or both.
Fixed annuities are insurance contracts that allow you to lock in a rate of earning that, even over long periods of time, remains unaffected by market ups and downs. The principal investment and a specified interest rate are both guaranteed.
A fixed indexed annuity is a tax-deferred, long-term savings option that provides principal protection in a down market and opportunity for growth. It gives you more growth potential than a fixed annuity, but with less risk and less potential return than a variable annuity. Returns are based on the performance of an underlying index, such as the S&P 500® Composite Stock Price Index. While the benchmark index does follow the market, as an investor, your money is never directly exposed to the stock market.
Generally, annuities have contract limitations, fees, and charges, which can include mortality and expense charges, account fees, underlying investment management fees, administrative fees, and charges for optional benefits. Most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. Withdrawals of annuity earnings are taxed as ordinary income and may be subject to surrender charges, plus a 10 percent federal income tax penalty if made prior to age 59½. Withdrawals reduce annuity contract benefits and values. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing company. Annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association.
