Deciding what type of annuity to purchase is often a decision based on 2 things :
- Your risk capacity (comfort level with uncertainty).
- Your plan on when to start taking a lifetime income.
There are 4 types, or variations, of the annuity in the American insurance industry: Fixed, Indexed, SPIA, and DIA.
Fixed Annuities can be easily compared to a CD at a bank: A fixed rate of interest for a term. They are also known sometimes as MYGA's, or Multi Year Guaranteed Annuities. Generally the insurer allows monthly withdrawals of interest, and sometimes, they will allow up to 10% annual withdrawals.
Fixed Indexed Annuities are fixed annuities with minimum annual guarantees, but with the added feature of
interest credits based on (growth only) in a stock index. Once the guarantee of policy principal has been accomplished the insurer purchases call options on an underlying index, such as the S&P, and some (but not all) of the growth in that index is attributed to the annuity. Insurers limit the full upside of the market with either fees, or spreads, or caps to protect themselves when the market inevitably declines again. However, double digit returns have been accomplished in the bull markets of 2012 to 2014, with no risk of loss, with these products as well. Fixed indexed annuities terms range anywhere from 7 years to 16 years. These annuities can also be annuitized for lifetime income usually after the contract has been in force for a few years, depending upon the terms of the policy.
Many Indexed Annuities also allow the option for the owner to purchase a lifetime income rider at the beginning of the policy which will guarantee a more specific lifetime income amount (that you can be aware of when the policy is issued) than what might be available from mere annuitization later.
Variable Annuities represent the largest volume of annuity products sold in the marketplace, possibly because of the entrenched distribution system of licensed securities professionals available to the public. Variable annuities offer the full upside and downside of the stock marketplace with some insurance guarantees not normally associated with stock market products. Those benefits may include guaranteed death benefits, income benefits and withdrawal rates.
Becuase the variable annuity owner is fully participating in the market, there are a variety of fees associated with variable annuities that enforce the guarantees that the contract provides. Often those fees can eat up much of the growth in the policy, if any. Variable buyers need to be prudent in the purchase of these types of annuities as very often the guarantees offered by agents often "hypnotize" prospects into thinking that their principal will never go down, which is entirely untrue.
