Though I’ve talked about this subject a few times over the years, those who are new to my column may not be familiar with the different types of annuities and how they work. So, today we will take a brief look at annuities and some of their distinguishing qualities. Before we do, however, I want to be clear on one point: I believe that, for some people, annuities can be an important part of a retirement plan, but I would never put all a person’s money into an annuity!

 

First, what is an annuity? An annuity is the exchange of a specified sum of money for the contractual promise of future income payments by an insurance company. An annuity can either be “immediate” or “deferred.”

 

Immediate. With an immediate annuity, you give the insurance company a lump sum of money and, in exchange, they will give you a monthly payment for the rest of your life. The checks start “immediately.”

 

Deferred. With a deferred annuity, you give the money to the insurance company, but the payments are “deferred” until a future time (five years, for example). At that future date, you can draw on the annuity (which most people do) or turn it into an immediate annuity.

 

There are 3 types of deferred annuities: fixed, variable, and index.

 

1. The fixed annuity is often compared to a bank CD. The insurance company guarantees your principal and pays interest on the money you put into the annuity. The money also grows without taxes during the deferral period. If you take out more than the annually allowed amount prior to the end of the required “commitment period,” there is a surrender charge.

 

2. The variable annuity is both an insurance AND security product. It is sold by licensed security brokers. Money is invested in “sub-accounts,” and the value will vary depending on the movements of the stock market. The money invested is not guaranteed by the insurance company, and sometimes the fees and expenses can be high.

 

3. The index annuity has a guarantee of principal by the insurance company, but the interest will vary depending upon the movements of the stock market.

 

This is a basic, bare-bones explanation of annuities. Should you want to learn more, just give my office a call!

 

386-671-7526 or 888-747-7526