Different Types of Annuity Explained Easily
Types of Annuity
Basically there are total four types of annuities in Finance, which are based on two major factors such as, Time for starting receive payments and how would that annuity be grow.
- Immediate fixed
- Immediate variable
- Deferred fixed
- Deferred variable
Major Factors of Annuity Types
What does mean Time for Start Receive Payment
In Annuities, you have choice to go for either receive your annuity payments immediately after paying the insurer a lump sum, that is known as immediate or receive monthly payments in the future, that is known as deferred.
How your Annuity be grow
Annuities can grow in a various ways – through fixed interest rates and by investing contributions in the variable market.
What is Immediate Annuity
Immediate annuities holder start receiving payments within a year after purchasing it. It is intended specially to deliver an immediate guaranteed lifetime payout. It is one of the complicated components in retirement income planning is figuring out. It also known as an income annuity.
What makes immediate annuities so appealing is that the fees are woven into the payout – In Simple words, you have a lot of money and some fraction of money you contribute in immediate annuity, in this you already know the schedule of how much money you will be receiving for the future, for the rest of your life, that is why immediate annuities are so much appealing.
Drawback of Immediate Annuity
You are dealing liquidity for guaranteed income, therefore, you generally will not have any access to the full lump sum in any emergencies occurrences.
Upon the death of the annuitant Payments can end and also cannot keep pace with inflation.
However, if you decided to securing your lifetime income, then a lifetime immediate annuity could be the right choice for you.
What is Deferred Type of Annuity
Owners of Deferred annuity receives payment either in lump sum or monthly income on tax deferred basis that will start in the future. Such as, when a person who will retire in future. Tax deferred means you will not have to pay taxes until you take money out; moreover, there is no any contribution limit.
For example, you pay a lump sum or monthly payments on a type agreement you chose either deferred or fixed to the insurer, who will then invest them into the growth. Now its depending on the investment type you choose, deferred annuities deal with possible for the principal to grow before receiving payments.
Drawback of Deferred Annuity
Subject to early-withdrawal penalties; may not keep pace with inflation.
Fixed Types of Annuity
In fixed annuities, the insurer offers you a guaranteed fixed interest rate on your investment on agreement of what length of your guarantee period. That interest rate may last anywhere between a full-length of your guarantee period and year.
When your contract is over, you can renew your contract, or transfer your money into another annuity contract or retirement account.
It has less risk because fixed annuities are based on the guaranteed interest rate and your income is not stuck by market volatility, you will already recognize exactly how much your monthly payments will be. Fixed annuities are better used for growing income in the accumulation phase, not for generating income in retirement.
Variable Types of Annuity
A variable annuity is more risky but has potentially higher rewards. Variable annuities interest rate is attached with an investment portfolio. If the portfolio performing well and good then payments from variable annuities may increase, but they may also decrease in case of the investments lose money.
It is a type of tax-deferred annuity contract that allows you to invest your money into sub-accounts, plus the annuity contract that can guarantee your lifetime income. With time, your sub-accounts can help you save up with or even outperform inflation.
Dear Students Explorer!
If you have any confusion in understanding the types of annuity, then let us know through comment section below this post, so we may resolve your confusion.
[…] May Also Like: Different Types of Annuity Explained Easily What is the Simple Interest with Formula and Example Basic of Finance and its Overview Types of […]