Types of Annuities
Immediate Annuity
- Pay for the rest of your life,
- Pay for a fixed period of time, or
- Pay as long as you and the person you choose as a beneficiary are still living
Pros:
- Guaranteed income 1
- Generally provides a higher payout than other annuities
- No fees
Cons:
- Payouts on most immediate annuities are interest-rate sensitive
- No growth opportunities
- No inflation protection
Best for:
- Pension replacement
- Immediate income
- Estate distribution
Fixed Annuities2
In general, the value of a Fixed Annuity increases because the insurance company agrees to pay you a specified interest rate and your periodic payments will be a specified per-dollar percentage of the funds in your account. Interest rates are historically higher than bank CDs and other popular income investments, and they’re also tax-deferred.
Typically, fixed annuities don’t have payments that begin immediately but you have the flexibility to choose if and when to start receiving periodic payments.
Pros:
- Tax-deferred growth
- Interest rates typically higher than CDs
- Protects against probate court
- No fees
Cons:
- No market growth opportunity
- Early withdrawal penalties
- Tax consequences on early withdrawal
- Limited increase in income to compensate for inflation
Best For:
- Wealth preservation
- CD alternative
- Conservative investors
Fixed Index Annuities3
With a Fixed Indexed Annuity, your account principal is linked to a stock market index like the S&P 500 Composite Stock Price Index.4
Your contract value will be no less than a specified minimum, regardless of stock market performance. As a result, it provides opportunity for higher returns yet protects your principal from any market down turn.
Pros:
- Low fees (typically 0% – 1.5%)
- Cannot lose principal or growth due to market volatility
- Tax-deferred growth
- Protects against probate court
Cons:
- Limited annual liquidity
- Early withdrawal penalties
- Tax consequences on early withdrawal
- Adjustable participation rates and caps
Best For:
- Wealth preservation
- CD alternative
- 401(k) rollovers
Variable Annuities5
With a variable annuity, you have a range of investment options. Your money is typically invested by the insurer in professionally-managed mutual funds that can invest in stocks, bonds, money market instruments or a combination of all three.
This type of annuity offers potential for higher returns when compared to other types but there is the risk of loss due to investment in the market.
Pros:
- Choice and flexibility
- Higher potential for tax-deferred growth
- Optional, guaranteed lifetime income
- Full accumulation at death with optional rider
- Protects against probate court
Cons:
- Risk of loss due to funds invested in the market
- In the event of a volatile stock market, principal and growth may not be available in a lump sum withdrawal at the term’s end
- Typically higher fees (1% – 4%)
- Early withdrawal penalties
Best For:
- Risk-tolerant investors who want to invest in the market
- Those who have maxed out other alternative tax-deferred options
- Investors looking for diversification
- Those interested in passing on increased death benefits to beneficiaries (depends on riders selected)
