3 Main Types of Annuities
At Mountain Financial, annuities are one of our most popular financial products. Annuities are contracts between individuals, called annuitants, and insurance companies. There are several types of annuities, and some variations are within each type. However, a few annuities addressed here are more attractive to our investors.
In general, you can think of annuities like private pension plans. In return for your lump sum contribution or an agreement to pay premiums over time, an insurance company promises to pay you a certain fixed sum of money periodically beginning at a specific age. The payments can last for a fixed period, or you can opt to receive payments for as long as you live. Annuities provide retired individuals with a guaranteed minimum income, which is why they are popular retirement vehicles.
While each annuity contract is individual to the annuitant, annuities can be divided into several types. People find these three types of annuities most appealing when shopping for annuities.
Immediate Annuity
Immediate annuities are contracts where you pay a lump sum to the insurance company. In return, the insurance company agrees to pay you a specific amount periodically (usually monthly) starting right away. Because the payments begin immediately, the lump sum investment you make will need to be considerable.
The size of the payments you receive will depend upon the amount of money you invest and the options you choose. Some annuitants are only interested in ensuring they are cared for during their lifetimes. Others may want the payments to continue for a fixed period (perhaps five or ten years), and still others may wish the payments to continue beyond their death to provide for other beneficiaries, such as their children.
Immediate annuities can cover a single individual or may cover a couple. In these “joint and survivor” arrangements, payments will continue to be made to a surviving spouse after one dies. The size of your investment determines the size of the payments, and if you spread them out over a more extended period, the payments will be lower.
Deferred Income Annuity
A deferred income annuity is the most straightforward, although variations also exist within this category. Deferred means that you agree to collect your payment at a later specified date rather than now.
Deferred annuities can offer some significant advantages over immediate annuities. First, you do not have to pay all your investment funds upfront. Instead, you can pay your premiums over time, relieving you of immediate cash flow worries and allowing you to invest a larger amount of funds in the annuity. The waiting period gives your investments time to grow, which usually means that the return you get, in terms of the size of your fixed payments, will be higher.
In addition, depending upon the source of funds you invest and your tax bracket now versus when you begin collecting payments, a deferred annuity may offer you some tax advantages versus other types of investment vehicles.
Long Term Care Annuity
Today, advances in medical science mean many people who experience specific ailments or medical episodes live much longer than they used to. But sometimes, living longer means aging with increasing levels of debility. When people can no longer take care of themselves, they often opt to move into some assisted living situation. They may be relieved of responsibilities like cooking and cleaning or may need one in which they can receive help from caregivers for things like bathing and dressing.
However, these types of facilities are expensive. And if you live for a long time, even a large nest egg can rapidly dwindle if you have to pay for long-term care. One way to address this possible eventuality is with a long-term care annuity.
Purchasing a long-term care annuity may seem risky in that it is possible that you may never need long-term care. However, long-term care annuities are often structured such that you do not “lose” your premiums. For example, a deferred income annuity may have a “long-term care” rider that essentially “puts aside” a portion of your invested funds to cover long-term care, should you need it, but which can be passed down to beneficiaries if these funds are never accessed. There are numerous ways to ensure that you are covered for different eventualities that don’t forfeit your life savings.
Are There Any Downsides?
Annuities may sound too good to be true, but you need to be aware of a trade-off: once you invest, you generally cannot get your money back right away. In most annuity contracts, there is a provision for a “surrender” period during which you can retrieve your funds, while other annuity contracts may permit you to recover your funds at any time, but often at the cost of paying a significant fee. In other words, once you invest the funds, you lose the liquidity of those funds over the course of the following several years. There are some annuities that provide the option to freely withdraw a small portion of the funds without penalty. In practical terms, this means that the amount you invest in an annuity should not encompass your entire “nest egg,” just in case you need to be able to access funds for some emergency or unexpected turn of events. Thus, an annuity might be best suited for existing funds that are already under similar parameters such as qualified plans, old 401(k)’s, etc.
For many people, the pluses of annuities far outweigh the downsides. The fact is, an annuity can provide tremendous peace of mind. Not only have you taken care of your future, but you are relieved of the burden of making investment choices yourself. Insurance companies assume the risk of market downturns by guaranteeing a rate of return that is often superior to what many other types of investments provide.
For more information about these three types of annuities or the many other annuity products available, contact Mountain Financial today. No matter what your long-term goals are for your retirement, we will work to find an annuity that meets your needs.
