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Learn About Different Types of Annuities

Gaurav Bhola, MSM, Managing Editor

Annuities are popular investment vehicles offered by insurance companies to compete with equities. Here are some important types of annuities:

Variable Annuities and Fixed Annuities
Fixed annuities guarantee your principal and a minimum interest rate. As long as the existence of the insurance company is not in jeopardy, the fixed annuity will continue to grow unhindered. The growth of your principal can occur by specific interest rate earnings, or earnings via a specific formula. The growth of a fixed annuity account does not depend on market fluctuations but on no/low risk investments.

Unlike fixed annuities, variable annuities don’t guarantee performance. A variable annuity doesn’t guarantee your principal. The annuity invests in mutual fund like investments, you can choose from equity funds, bond funds, and cash accounts. Herein, the growth of your variable annuity portfolio depends on the performance of the mutual funds.

Immediate Annuities and Deferred Annuities
A deferred annuity continues to receive premiums into it until the annuity is annuitized. Annuitization initiates the process of withdrawal from an annuity. Generally, annuitants or owners of an annuity continue to pay into the annuity expecting their investment to grow until such a time that they can start withdrawing from it. The annuitization for most deferred annuities occurs 10, 20, or more years down the line, typically during retirement to supplement income.

However, an immediate annuity is not funded over a period of years but with one lump sum payment. Once a payment is made into an annuity, the payout to you begins immediately. The time period for the payout can be for a lifetime or period certain.

Lifetime Annuities and Fixed Period Annuities
A fixed period annuity pays the annuitant income for a period certain, such as 10, 15, or 20 years. The amount disbursed to the annuitants depends on the length of the payout, the value of the annuity, and the interest rate the insurance company believes it pays for the tenure of the pay-out period.

A lifetime annuity offers the annuitant income for the rest of the person’s life. Some payout options allow the payments to continue for the lifetime of the annuity’s beneficiary or joint survivor. Only certain annuity investment vehicles have this feature, no other financial product can compete with an annuity in this realm. Annuities continue to grow in popularity because of their great features, features that mutual funds and stocks can never compete with.



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