3 Types of Annuities: How Do They Differ?
Over the years, annuities have grown in popularity as individuals have looked for ways to help secure their financial future. What exactly is an annuity? In basic terms, it’s a contract that one signs with an insurance company to receive a regular stream of income in the future. Annuities can be a good option for people who want the assurance of a stable income stream during retirement. However, with so many types of annuities available in the market, it can be tough to know which one is the right fit.
In this article, we’ll discuss the three main types of annuities, how they differ from one another, and what some of the pros and cons are of each.
- Fixed Annuities
Let’s start by discussing fixed annuities. In general, these are relatively simple and straightforward, and they offer a fixed interest rate that an individual can usually count on for the entire term of the annuity. Additionally, there is no market risk involved, and the person holding this type of annuity is typically protected from any market volatility. Moreover, it’s possible to choose to receive the payout in a lump sum or regular installments upon the annuity’s maturity. However, one should note that fixed annuities generally offer lower returns compared to other types of annuities.
- Variable Annuities
The second type of annuity is referred to as a variable annuity. These tend to be a bit more complex than fixed annuities yet typically offer higher returns. Instead of a fixed interest rate, variable annuities usually offer a wide range of investment options. This means that one’s returns will be directly linked to the performance of the investments they make. Hence, this type of annuity comes with greater market risk, and one should be comfortable with their own investment knowledge to make the most of it. It’s also important to keep in mind that variable annuities often come with higher fees compared to other annuity options.
- Indexed Annuities
Finally, there are what’s called indexed annuities. These annuities have characteristics of both fixed and variable annuities. Like fixed annuities, they offer a minimum rate of return that is guaranteed over the term and are protected against market declines. However, unlike fixed annuities, indexed annuities allow an individual to invest in the stock market through index funds. These funds aim to maintain a stable market return by tracking the performance of market indexes. Indexed annuities generally have a lower risk than variable annuities but usually carry higher fees than fixed annuities.
Selecting the right kind of annuity can be an important decision for one to make as they prepare for their future. It’s always a good move to discuss one’s personal goals and objectives with a trusted financial advisor before deciding which type of annuity to purchase. There are advantages and disadvantages to each. Be sure to understand the contract features and benefits (often sold as “riders”), costs, and restrictions involved before making an annuity purchase. Regardless of which type of annuity one might choose to purchase, investing in one can potentially be a good decision in helping to establish long-term financial security.
An annuity is a financial product that can offer tax-advantaged options to protect or grow your initial investment while providing protected income in retirement. Annuities are long-term investment products designed for retirement purposes and may be subject to investment risk. Guarantees are based on the claims-paying ability of the issuer.