Vehicle
Bar
Family
House
Bar
Insurance
 


Annuity Basics

Previous Next:  Selecting An Annuity

How Do Annuities Work?

There are two basic types of annuities: fixed and variable.

A fixed annuity income remains steady, even if returns on other investments slump due to a changing economy, declining interest rates or falling stock prices. A variable annuity income can rise and fall with your chosen portfolio performance. You may earn higher returns, but those returns are not guaranteed. Although the value of a variable annuity may fluctuate in the accumulation phase, it can be annuitized — begin a series of payments — as a fixed annuity. Thus, the payment only varies if you select a variable payout.

Fixed Annuity Variable Annuity

  • Earns a steady interest rate set by the insurance company.


  • Guarantees an unchanging income stream for your lifetime or another specific time period.


  • Appeals to people who want to ensure a steady, level, reliable income.

  • Lets you allocate your money among professionally managed stock, bond and cash equivalent portfolios.


  • Payouts may vary with portfolio performance.


  • Offers greater potential returns but are riskier than fixed annuities.

There are two basic types of annuity payouts: immediate and deferred.

Immediate Annuity Deferred Annuity

  • You put in a lump sum and your insurance company begins monthly payments to you right away.

  • You put in a lump sum or series of payments with your insurance company, with payments to begin at a future date.

Contract Types

Combining the fixed, variable, immediate and deferred annuity alternatives creates four annuity options based upon a combination of underlying annuity choices and when payments begin:
  • Fixed immediate annuity — You put in a lump sum and your insurance company starts making regular, equal payments to you right away.


  • Variable immediate annuity — You put in a lump sum and your insurance company begins making payments right away, but the amount of the payments will fluctuate based upon the return from the portfolio.


  • Fixed deferred annuity — Your payments earn interest at a rate set by the insurance company with a guaranteed minimum annual rate of return until payout begins at a future date.


  • Variable deferred annuity — Your options may include stock and bond funds offered by your insurance company. When payout begins, your account may be worth more or less than your initial investment, depending upon the performance of your portfolio.

Annuity Payout Options

Along with choices about how to fund your annuity and structuring your contract, you will have payout options. Common payout choices offered by insurers include:
  • A lump-sum alternative, which allows you to withdraw the total amount of your annuity.


  • An as-needed alternative, which allows you to withdraw the amount you need when needed.


  • A systematic alternative, which allows you to withdraw a specified amount until your annuity is depleted. Under the systematic alternative, how much you receive — and for how many months you receive it — depends upon how much you have in your account and how much you are withdrawing each month.


  • An annuitization alternative, under which you may receive either a life option where the income stream is guaranteed by the insurance company or period-certain option for a designated period — for example, for the rest of your life, as long as you or your spouse are alive, or a set period (such as 10 years). Common payout options include:


    • The life option, which provides an income stream for life because they are calculated based upon the life of the annuitant only.


    • The joint life option, which continues annuity payments to a spouse or another beneficiary upon the annuitant’s death. The monthly payment is lower than that of the life option because it is based on the life expectancy of both the annuitant and the beneficiary.


    • The life with cash payment option, which provides regular payments for the lifetime of the annuitant, with any remaining balance paid to the beneficiary in a lump sum.


    • The period certain option, under which the payments are made over a defined period of time, such as 10, 15 or 20 years.


    • The life with guaranteed term option, which provides a lifetime income stream with payments guaranteed to continue for at least a specific term, such as 10 years. If the annuitant dies during this guaranteed period, the insurance company is required to continue payments to the estate or beneficiaries for the remainder of the guaranteed term.
Consult a financial planning professional to determine the best option for your situation. Remember, payout amounts for each option will depend on the amount of money in your account, the payout period you select and the life expectancy (based on age and gender) of the annuitant or annuitants.

Previous Next:  Selecting An Annuity