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Explaining the Four Types of Annuities

Published September 14th, 2022 by Island Insurance Agency

People are living longer. About 1 in 6 people in the world will be aged 60 years or over by 2030. What’s more, the number of people aged 60 years and over will increase from 1 billion in 2020 to 1.4 billion.

With more life to live and more goals to pursue, it’s essential that you build an investment that lasts you a lifetime. Annuities can help you work towards retirement with a new sense of purpose.

But annuities come in many variations and can be difficult to understand the differences. Below is a guide that explains the four different types of annuities.

1. Immediate Annuity

When planning your retirement, it can be hard to figure out how long you're going to live. Investing in an immediate annuity plan ensures you have guaranteed income payments possibly for the rest of your life. This investment turns your current retirement savings into future income payments.

Immediate annuities can be classified into two -

  • Immediate variable annuity: Work like investment accounts such that you deposit a particular amount and what you earn depends on market performance
  • Immediate fixed annuity: In this annuity plan, the annuity provider agrees to pay you a set of regular income in exchange for a particular upfront payment

The downside is that you’ll be trading liquidity for guaranteed income. But if securing lifetime income is your goal, this type of annuity is good for you.

2. Deferred Annuities

If you are looking to build up your nest egg for retirement and then generate income once you reach there, deferred annuities are a great investment choice. In exchange for recurring or one-time deposits, your annuity company offers incremental repayments of your investment and some amount of returns.

But first, your annuity provider will invest your annuities into the growth type you agreed on.

Deferred Fixed Annuity

While this annuity’s interest rate is often smaller than market returns, it offers certain returns. This way you can know the amount of money you will have in retirement.

Deferred Variable Annuity

Invest your savings in subaccounts like mutual funds. If your investment does well, your money grows and increases your future payout. In case it underperforms, your future payout reduces.

3. Fixed Annuities

With a fixed annuity, you’re guaranteed retirement income payouts. You can start by making one or several payments to the annuity provider. They will invest the money in safe investments like U.S. Treasury securities and highly rated corporate bonds.

Then, you’ll get paid a fixed return on your contributions, regardless of how markets are performing. Although they are safe, the returns are usually low. A great choice for people with low tolerance risk.

4. Variable Annuities

Variable annuities allow you to invest in a portfolio of investments you chose as a buyer. The performance of these investments will determine how your account grows and the payout you will receive. It requires you to take more risks in exchange for better results.

However, there is a possibility that you may lose money with a variable annuity.

Invest in Different Types of Annuities

Looking to save for retirement? Annuities are a good investment choice. At Island Insurance Agency, we can help you understand the different types of annuities and pick the right one.

Contact us to get started.


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