There are two types of deferred annuities: fixed and variable. An insurance company invests monies from fixed annuities in bonds, while variable annuities are tied to stocks, mutual funds, commodities and other market indicators.
Annuities are an investment that can ensure long-term growth while preserving the underlying principal. There are several types of annuities to choose from that may be most effective in furthering your financial goals.
Two types of annuities are fixed and variable. Each has its own set of risks and benefits.
With a fixed annuity, your premium is placed in the insurance company’s general account and that money is mostly invested in different types of bonds. A variable annuity is connected to the performance of another financial instrument, such as stocks, mutual funds, precious metals or commodities.
Both fixed and variable annuities can be immediate or deferred annuities. Annuitants with immediate annuities begin to receive payments from the annuity shortly after purchasing it. Annuitants with deferred annuities don’t begin receiving payments for many years or even decades after they purchase the annuity.
Fixed annuities offer a guaranteed payout because they have a set interest rate of return. For the first year of the annuity, the rate is fixed. After that, the insurance company can raise or lower the interest rate on a yearly or multi-yearly basis, but not below a guaranteed minimum. There is no upper limit on contributions, and taxes on the growth are deferred until withdrawal.
Fixed annuities come with a guarantee that you cannot lose your principal unless the insurance company fails.
If you are older than age 59½, you can make annual withdrawals of up to 10 percent of the account’s value every year with no penalty. Those under age 59½ pay a penalty to the IRS.
Fixed annuities have several payout options, including lump sum withdrawals, periodic withdrawals or a combination of the two.
Although they are considered a low-risk option, there are some risks associated with fixed annuities:
Fixed annuities, in general, are not known for carrying a number of fees. Still, there are some fees that can be tacked on to any type of annuity. Such fees include:
Variable annuities are structured around the stock market and other fluctuating financial instruments, and therefore can fluctuate in profitability. When you purchase a variable annuity, your premium is put into various sub-accounts that align with your preferred level of risk.
The value of your variable annuity will vary depending on the performance of the investment options you choose.
Similar to fixed annuities, variable annuities grow tax-deferred, have no upper limit on contributions and offer different payout options. Just like fixed annuities, variable annuities can pay out in a lump sum, in smaller payments over time, or a combination of both.
Variable annuities are a higher-risk option than fixed annuities and, consequently, have some drawbacks:
In addition to the principal of the annuity, variable annuities also carry additional fees. Some fees specific to variable annuities are: