In the first post I wrote on annuities, I explain the difference.
Here, I’d like to explain briefly about the various types of annuities so you can continue learning how to secure your financial future, or become more comfortable with the options you have. An annuity is a financial product issued by an insurance company. Therefore, it is “risk-bearing.”
7 Primary Types of Annuities.
Based upon your financial goals, none, one, or more may be appropriate. Each operates differently and carries its own risks and benefits. Therefore, a financial professional is needed to evaluate them and to assess the suitability of any annuity for you. At that, he or she must assess the suitability of which type of annuity best serves your needs. That is both an ethical and legal requirement.
The 7 primary types of annuities and their main characteristics are as follows:
• Single Premium Annuity: A single, lump-sum payment is made to the insurance company. In return, the insurer agrees to make periodic payments over a stated duration.
• Multiple Premium Annuity: Several premium payments are made to the insurer. In return, the insurer agrees to make periodic payments over a stated time.
• Fixed Annuity: The money that you invest earns interest at a rate stated in the annuity contract.
• Immediate Annuity: Payments to you by the insurance company begin within one year of the payment of the premium.
• Deferred Annuity: This type earns interest at the contract rate until you tell the insurance company that you wish to start receiving periodic payments.
• Variable Annuity: After receiving your money, the insurance company invests it, less any applicable charges (the “load”) into a separate account. The nature of the account is determined by how much risk you are willing to take with your money. The investment can be in stocks, bonds, or other kinds of investments. The investments may gain or lose value and there is no guarantee of which way they will go.
• Equity-Indexed Annuity: This type of annuity pays interest, but the rate is geared to some external index, such as stock market returns.
As Baby Boomers age, downsize their homes, see their CDs mature, and in other ways come into cash, they are inundated with options to generate income for retirement. Annuities are one of them. Promotional ads and seminars may play on fact that you are familiar with the name of the insurer behind the annuity in order to develop a comfort level.
Never, ever, jump into a financial product as complex as an annuity (although it may sound like “insurance”) with your retirement money without professional advice. Ideally, the professional should be an individual with whom you have had a trusted past relationship.
In my career, I have seen many situations where annuities and insurance mix, and these ‘products’ are like oil and water. It is so critical you have a keen understanding of areas that are important for your long-term financial future, and I’m always here to help you as The Insurance Problem Solver. Give me a shout and we can have a conversation. The good news is, I’m neutral and will help you alleviate your headaches about insurance.