How to Choose the Best Type of Annuities for Your Lifestyle
Although there are many different types of different annuities to choose from for a specific lifestyle, many people do not understand what an annuity is or how to choose the right one for them. When it comes to annuities, it is important to choose the right one before you are stuck with something that will not work for you. So, what is the definition of annuity and what are the different types you should know about?
What are Annuities?
An annuity is a contract between the policyholder and an insurance company. For a lump sum payment, an insurance company promises to do four things: provide an income for a certain period or for life; provide for accumulation, or asset growth; provide death benefits; and provide long-term care benefits. When you make an investment in an annuity, you receive a payment later. The income you receive from an annuity can be doled out in monthly, quarterly, annually, or even in a lump payment. The amount of many you receive varies based on the type of annuity you have as well as the timing of your payments.
Types of Annuities
There are four different types of annuities that you can choose from: fixed, variable, immediate, and deferred annuities.
Fixed Annuities- A fixed annuity is an annuity whose value increases based on returns within the annuity contract. Typically, fixed annuities do not have payments that begin right away. But unlike deferred income annuities. The holder retains the flexibility to choose when to start receiving payments from the insurance company. Interest rates can be higher on fixed annuities than on bank CDs and other income investments and they are also tax-deferred.
Variable Annuities- Unlike a fixed annuity, variable annuity’s returns are tied to a certain market. Whether it is the stock market, bond market, a combination of the two, or a specific investment niche, a variable annuity can give you exposure to a board set of investments but with the protection of an annuity. Variable annuities often come with guarantees of a minimum payment. This type of annuity is tax-deferrable and comes with a broad range of available investment opportunities.
Immediate Annuities- An immediate annuity is one of the easiest types of annuities for most people to understand as it has very basic provisions. Typically, a fixed immediate annuity involves the holder making a lump-sum payment to an insurance company upfront in exchange for the right to receive payments from the insurer on a regular basis beginning immediately. The policyholder can structure an immediate annuity to pay for the rest of their life, for a fixed period of time, or for as long as they are living, leaving the rest of the money to a beneficiary. These payments are interest rate sensitive, so payments fluctuate.
Deferred Annuities- Unlike immediate annuities, deferred income annuities do not start making payments right away. But there are some similarities to immediate annuities.
When the policyholder pays a certain upfront amount, the insurance company pays them a certain amount once they reach a specific age. Many people use this type of annuity to protect against longevity risks. This type of annuity is somewhat sensitive to interest rates, but the payouts can be higher than immediate payouts.
Choosing the best annuity for you should depend on several variables including risk orientation, income goals, and when you want to begin receiving annuity income. For more information on choosing the right annuities for you, talking to an investment advisor can help. Let WeberMessick help you choose today!
Choosing Your Annuity Accounts with WeberMessick
Want more information annuities? Contact WeberMessick today! Since 1984, WeberMessick’s team of CPA’s and financial advisors have been helping individuals and businesses throughout the Maryland and Delaware devise a plan for their finances. With a “client-first” philosophy, WeberMessick has been helping their clients achieve financial success. Whether it is through financial planning or our accounting services, WeberMessick is always here for you!