Free Retirement Classes. What You Need To Know To Retire Successfully
What are annuities?
Types of Annuities
Annuities Fees & Expenses
Annuity Terms Glossary
Taxation Of Annuities
Pros & Cons of Annuities
Objections to Annuities
State Annuity Guaranty
Questions about long-term care?
When most people think of long–term care for the elderly, they think of nursing homes. But it can involve much more than that.
Types of Annuities
Annuities are generally divided into two categories: those designed primarily to provide income right away (immediate), and those designed primarily for savings (deferred). All annuities can generate income through annuitization. However, the underlying designs and features are focused in either of those two ways.
With immediate annuities, the insurance company provides a series of guaranteed payments that begin right away. With deferred annuities, you make one or multiple payments over a longer period of time, allowing your premium to accumulate interest.
Many savings annuities offer income guarantees beyond annuitization through an optional rider, although we still consider them savings annuities because that is primarily how they are used.
There are three types of deferred annuities: fixed, variable and fixed index.
While traditional fixed annuities provide a steady, guaranteed interest rate for a specific number of years, variable annuities can possibly provide higher growth on your premium — at the cost of greater risk. Fixed index annuities (FIAs) combine some of the characteristics of both.
Your needs, as well as your age and life expectancy, will dictate which immediate payment annuity is the right choice. A few things to decide include whether to maximize income now with a fixed payout, or take a lower payout initially while indexing future payments to inflation.
Annuitants may also choose whether they want a guaranteed payout or a variable payout, which may include a base payout plus a portion that is tied to the performance of a stock index, or a payment entirely pegged to an index.
Annuitants may also decide how often they are paid, known as a “mode.” A monthly mode is the most common, but quarterly or annual payments are an option.
One large drawback of an immediate annuity is that payments end upon the death of the annuitant. If an annuitant dies earlier than expected, payments stop and the insurer or financial institution that sold the annuity keeps the principal balance.
Some other options include adding a second person to the annuity (joint and survivor), or guaranteeing that payments are made for a certain period, or seeing that the principal is fully refunded (refund annuity). Such provisions cost more, however.
Once purchased, an immediate payment annuity cannot be canceled for a refund of principal. This may pose a problem should the annuitant require access to a large sum of money to deal with an emergency.
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