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Annuities are investment products that may be used to help you increase savings, protect your savings, or generate a stream of income. An annuity is a lump sum of cash invested to produce a monthly stream of income for a fixed period or for life. The income can start now (immediate annuity) or in the future (deferred annuity). Funds are not protected or insured by the issuers. Annuities are popular because they can offer tax-deferred savings for retirement and a choice of income options to meet an individual’s needs in retirement. Annuities are the only financial product that can turn a sum of retirement savings into guaranteed income for life. Some annuities also provide guaranteed income for a surviving spouse or dependent.
Types of Annuities
Indexed
An indexed annuity is a contract issued and guaranteed by an insurance company. You invest an amount of money (premium) in return for protection against down markets, the potential for some investment growth, which is linked to an index (e.g., the S&P 500® Index), and in some cases a guaranteed level of lifetime income through optional riders. The objective of purchasing an indexed annuity is most often to realize greater gains than those provided by fixed annuities, while still protecting principal. An Equity-Indexed Annuity offers important insurance features including tax deferral, a death benefit that may be paid outside probate, and annuitization.
Fixed
Fixed annuities are insurance products which protect against the risk of outliving your income. It's an insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal.
Immediate
An annuity contract that is purchased with a single lump-sum payment and in exchange, pays a guaranteed income that starts almost immediately. An immediate payment annuity is especially suitable for retirees who are concerned about outliving their savings. However, one disadvantage is that an immediate payment annuity is irreversible once it has been purchased. This may pose a problem should the annuitant need a large sum to deal with an emergency.