When you think of life insurance, you typically consider how it can protect your family if you die. But what if you live longer than you expected? Will your savings outlive you?
Understanding “annuities 101” — the many types, tax benefits, payouts, and structure — will help you feel more confident in arranging for your retirement needs. There may be numerous aspects to consider, but a solid foundation of knowledge will enable you to make the greatest decision.
What Exactly Is an Annuity?
An annuity is a contract between you and an insurance company that allows you to invest in a tax-deferred account. In exchange, you can receive regular payments as income, or you can withdraw the cash when you need them.
Many people chose annuities as a tax-deferred option to earn assured income in retirement. Let’s look at the many forms of annuities and how they differ in tax benefits, payouts, and structure.
What Are the Various Types of Annuities?
Annuities are classified into two types: immediate and delayed.
Annuity with Immediate Effect
The income from an instant annuity begins as soon as the account is activated. However, to establish the payment amount, you must first pick whether you want to receive the income for the rest of your life or a specific number of years.
Annuity with Deferred Payment
The accumulation phase is the first stage of a deferred annuity. First, you contribute, and the annuity increases tax-free. Then, throughout the payment term, which begins after the annuity is opened, you will get either a continuous stream of income or a lump sum.
Annuities with a Single and Multiple Premium
There are also single-premium annuities and multiple-premium annuities. A single-premium annuity requires you to pay a single lump payment at the start, which appreciates over time. On the other hand, a multiple-premium annuity allows you to spread out your premium payments over time.
Are There Any Other Annuity Types?
Annuities are also classified according to their level of risk and how they generate income. So, there are two extra components to consider with annuities: fixed and variable.
Annuity with Fixed Payments
Fixed annuities ensure growth for the annuity’s life based on a minimum interest rate.
Keeping this in mind, the insurance company may periodically increase or lower the rate based on market conditions for a specific period — but it will never go below the guaranteed minimum interest rate. Therefore, fixed annuities can benefit people who seek to reduce risk while receiving a fixed payout.