Plan for Tomorrow | What are the different types of annuities?
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What are the different types of annuities?

Jun 5, 2023, 5:26:33 PM | Reading Time: 6 minutes

With the length of retirement continuing to grow, many people face a savings gap that could leave them without enough assets for the future. Research has shown that nearly four in ten pre-retirees are concerned about outliving their savings, as factors like inflation can deplete purchasing power. Creating a financial plan that provides the income you can count on in retirement is becoming increasingly important. Including an annuity as part of your overall financial strategy can help you grow and protect your retirement savings while providing income for the future. Here’s a breakdown of the different types of annuities, and determine which one may be right for you.

What is an annuity?

An annuity is a long-term contract between you and an insurance company where in exchange for lump-sum or periodic payments, you can receive an income stream in retirement. These products are specifically designed to help you address the risk of outliving your retirement savings and offer more financial security to your retirement plan.

What are the benefits of annuities?

Designed to turn your retirement savings into retirement income, annuities can help supplement your pension, investments, 401(k), Social Security benefits, and other personal assets. They can be customized based on your retirement timeline, financial goals, and risk profile. Benefits of annuities include:

Tax-deferred growth potential

You will only have to pay income taxes on any earnings from your annuity once you begin making withdrawals.1

Possible downside protection

Fixed Index annuities offer growth potential without the risk of losing premiums due to market downturns while not being directly invested in the stock market.2

No annual contribution limits

Unlike some other retirement savings vehicles, some annuities may not have a limit on the amount of money you can put into it every year. Certain restrictions may apply based on the annuity contract.

Lifetime income benefits

Certain annuities offer a guaranteed income option to help provide income you can count on for the rest of retirement.

Legacy benefits

Some annuities offer a death benefit to maximize the legacy you pass to your beneficiaries.

How do annuities work?

Annuities typically have two phases: the accumulation phase and the payout phase. During the accumulation phase, the payments that fund your annuity can grow on a tax-deferred basis, helping to build cash value. When you reach retirement and are ready to receive income payments, the annuity enters the annuitization phase, also known as the payout phase. The amount and time you receive your payments will depend on your chosen annuity.

Types of annuities

To help build your financial strategy and meet your income needs for retirement, an annuity may be a beneficial addition to your plan. Depending on your age and retirement goals, different types of annuities meet your needs.

Immediate annuities

Provide steady retirement income and are funded by a lump sum payment where withdrawals begin within 30 days to one year.

Single premium immediate annuity (SPIA)

Purchased with a single lump-sum payment, an SPIA does not have an accumulation phase but begins paying out guaranteed income soon after purchase. Often people approaching retirement age may choose this type of annuity to help supplement their pension, Social Security, and other retirement income.

Deferred annuities

Pays a lump sum or income payments at a later date. There are several types of deferred annuities that offer optional add-ons to help turn your retirement savings into income for the future.

Variable annuity

With a variable annuity, you choose investment subaccounts to invest the funds. Your premium is then invested in different assets like money market funds, stocks, and bonds. The value of a variable annuity will vary over time based on the performance of the investments you choose. While there is higher growth potential than other types of annuities, there is also more risk with a chance you could lose money during market downturns.

Fixed annuity

With a fixed annuity, your contributions grow at a guaranteed specified interest rate for a certain period of time. A common type of fixed annuity is a multi-year guarantee annuity (MYGA) which guarantees an interest rate for a specific period of time. A key difference between a MYGA and traditional fixed annuity is the length of time the interest rate is guaranteed.

Fixed index annuity

Helping to balance growth potential and principal protection, a fixed index annuity is designed to help grow your retirement savings while protecting your premium from market volatility. Since your premium is not invested directly in the market, the interest credited will never be less than zero, even when there are fluctuations. Many fixed index annuities also offer guaranteed income options that provide income payments for the rest of your life.

What annuity is right for me?

As you explore the different types of annuities and which one may fit into your retirement plan, some considerations include: when you plan to retire, your overall financial goals, and your comfort level with risk. If retirement is far in the future, you may wish to choose an option that allows you to grow your retirement savings while protecting those assets from loss. Or, if you’re a soon-to-be retiree, you may have greater protection with a guaranteed income stream.

A financial professional can help you to explore the benefits and limitations for annuities and their options to determine which one may be right for you. Supplementing your income plan with an annuity may help you create lasting retirement savings and offer more financial security.

1 Under current law, annuities grow tax deferred. An annuity is not required for tax deferral in qualified plans. Annuities may be subject to taxation during the income or withdrawal phase. Neither North American Company for Life and Health Insurance, nor any financial professionals acting on its behalf, should be viewed as providing legal, tax or investment advice. You should consult with and rely on your own qualified tax professional.

2 Fixed index annuities are not a direct investment in the stock market. They are long term insurance products with guarantees backed by the issuing company. They provide the potential for interest to be credited based in part on the performance of specific indices, without the risk of loss of premium due to market downturns or fluctuation. Although fixed index annuities guarantee no loss of premium due to market downturns, deductions from the accumulation value for optional benefit riders or strategy fees or charges associated with allocations to enhanced crediting methods could exceed interest credited to the accumulation value, which would result in loss of premium. They may not be appropriate for all clients. Interest credits to a fixed index annuity will not mirror the actual performance of the relevant index.

The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.