Saturday 08/30/2008

Learning Center > Annuity Guide > Part 4 - Types of Annuity Contracts.

What are the different types of Annuities?

While deciding the kind of annuity you should purchase, keep in mind your requirements and long term financial goals. Your age and responsibilities also need to be kept in mind.

There are a number of different types of Annuities available and you must select the one that best suits your needs. Here are a few things to Consider.

Decide when you want the annuity payment to come to you

Immediate Annuity

If you want and need to receive income immediately for a certain period of time or for as long as you live, you should go for an Immediate Annuity, which will start giving you a fixed amount of income, soon after your funds are transferred to an annuity. This option is good especially for those of you who are close to retirement and need to supplement your income.

Deferred Annuity

If you need a fixed income coming to you only after a certain period of time (*this applies usually to those people who still have some time left for retirement*) you should consider investing in a Deferred Annuity. This way, the income that you invest in an annuity goes on growing and collecting and starts coming to you only once you really need it. In such a case, the income grows and multiplies on a tax deferred basis and you pay tax only once you actually start withdrawing the money. This is a great way to plan for the future.

Deferred Annuities and some others too offer a Death benefit - this means that in the event of your death, the annuity income is paid to your heir including any investment income that the income accrued.

Decide how you want your money to be saved and invested: You face the risks!

Annuity Contracts range from Fixed to Variable.

Fixed Annuity

What is a Fixed Annuity? - A Fixed Annuity is one that pays you a fixed income each month from the time that you decide to start receiving money. The rate of return or the money that will come to you every month is pre decided and does not change. Money saved and invested in a fixed annuity grows on a tax deferred basis. Investment of money in a fixed annuity is a good choice for those of you who do not like to take risks and prefer to know exactly how much would come to you every month.

Variable Annuity

What is a Variable Annuity? - A Variable Annuity invests your money in Stocks and Bonds. The income that you get from investing in annuities is subject to change every month depending on the fluctuations in the Stock market. Hence, it is difficult to predict how much return you would get on a regular basis. Your income grows on a tax deferred basis and you can decide to get the returns immediately or on a long term basis. Investment in Variable Annuities is a good choice for those of you who are younger and do not fear stock market fluctuations. You stand the chance of earning better returns that accumulate and pay off in your retirement years.

Hence, based on your long term needs and requirements, you can select a Fixed Immediate Annuities or a Variable Immediate Annuities, a Fixed Deferred Annuities or a Variable Deferred Annuities.

Wait! There’s more -
There are a number of ways in which you can receive the annuity income -

A Lifetime or a Straight Life annuity option is one in which you will be paid annuity income for your entire life. This option enables you to get a regular income for as long as you live even if the amount you invested in the annuity gets exhausted! However, in some cases, if you die before the money gets used up in your fund, no money will be paid out to your dependants or heir. This option of receiving money is good for those of you who need to take care of your own needs and want to make sure that you don’t outlive your assets.

A Joint and Survivor annuity option is good for those of you who have other responsibilities and need to take care of your dependants. In such a case, you are paid annuity income for as long as you live and even after your death, the designated survivor is paid income for a fixed number of years and in some cases, for as long as they live.

A Refund Annuity provides you annuity income for as long as you live. However, in the event that you die and you have not received all the payment that is due to you in lieu of the premiums that you have paid towards the annuity, your beneficiary or dependant stands the chance of getting the income that you did not receive in your lifetime.

You also have the choice to receive payments all at once as a lump sum amount or break down the total amount into distributed payments.