Annuities Come in 4
Deciding what type of annuity to purchase is often a
decision based on 2 things :
1) Your Comfort Level with Risk
2) 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 Annuties are straightforward. The insurer provides a minimum interest rate guarantee for each year of the contract. Every year, however, the insurer announces a declared rate of interest (preferably) above the minimum interest guarantee. Contracts can run anywhere from 3 years to 16 years long.
Fixed annuities can also offer rates called MYGA (multi year guaranteed annuity) whereupon the interest is fixed for a set period of time, say 3% for 5 years, for example. These "CD - Type" annuities are popular in times of higher interest.
Fixed annuities can be annuitized for lifetime income usually after the contract has been in force for a few years.
Fixed Indexed Annuities are also fixed annuities usually also 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 and 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 aslso be annuitized for lifetime income usually after the contract has been in force for a few years.
Many Fixed 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.
SPIA, or Single Premium Immediate Annuities are offered by insurers for policy owners that want lifetime income, or for a specific period, immediately. SPIA's, as they are called, are often use by courts to pay judgments, or received by lucky lottery winners. SPIA's provide a systematic way of receiving a pension in some cases. When interest rates are high, SPIA's can also be quite popular.