The 4 Main Types of Annuities, Explained

The number of Americans not prepared for retirement comes in at a whopping 64%.

This retirement gap could be because of a lack of income, preparation, or understanding of what investment options are out there. Interestingly, one of the more active ways to prepare for retirement is to invest your money in annuities. 

This is an insurance product that, unlike a 401K, has a guaranteed return on investment. As a result, you may make more money depending on the types of annuities you invest in, but you can count on a set minimum monthly payment for the payout term. 

That’s why annuities are an insurance product, even though you can purchase them through traditional brokerages. 

In the following article, we’ll take a look at four of the most popular types of annuities. 

1. Immediate Annuities

If you want to invest right now and receive a return as soon as possible, then an immediate annuity is the right product for you. Once you purchase the product, you could start seeing monthly payments in as little time as 30 days. 

However, this insurance product works best if you put down a considerable sum of cash. Then, the money is paid back to you over the set term. There is no waiting for the annuity to mature. However, the quick turnaround may limit your return on investment, and you may pay higher fees. 

You can learn more about the monthly payment arrangements through your financial institution. 

2. Deferred Annuities

The most important thing to know about deferred annuities is that they grow tax-free for the length of the maturation process. So if you are years away from retirement or are planning for a child’s college or wedding, then a deferred annuity is a good bet. 

The money you place in the annuity grows according to the type of product you’ve selected. Also, you can make monthly payments into the annuity instead of paying a lump sum upfront. In this way, the annuity is acting much like a 401K, but with a guaranteed minimum payout at maturation.

The monthly check may get larger depending on the annuity’s structure, but it won’t be less. 

3. Fixed Annuities 

There are several ways an annuity grows. The most dependable of these is a fixed annuity. With this product, your annuity grows at a fixed interest rate and is paid out as a guaranteed amount.

While the lack of risk makes this an attractive financial product, you should expect a lower return on investment than with other types of annuities.

4. Variable Annuities

A variable annuity is made up of separate accounts containing stocks, bonds, and other financial products. Again, the annuity is guaranteed to pay out a certain amount, but if your subaccounts do well, then that profit contributes to your monthly payment. 

You can also structure a variable annuity to link to a major financial index. These types of annuities are also referred to as equity-indexed annuities. Here, the money you pay for the product is invested in a fund linked to a stock index like the Dow Jones Industrial Average or S&P 500. 

In this example, if the S&P grows, your return on investment gets larger. 

The Types of Annuities Depends on You

With all the above products, the types of annuities that will work best for you depend on your unique financial situation. For example, you may need an immediate return, or you may have the capacity to wait for the annuity to mature. 

Whatever you choose to do, you should take the time to contact a financial consultant to review your options before you invest. 

Did you find this article informative? Search this website for more on financial matters and annuities. 

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