Annuities are financial products designed to provide a steady income stream, often used as a tool for retirement planning – although they can also be used in other ways, such as helping create an income stream after a financial settlement.
Annuities of all kinds are offered by insurance carriers, and allow individuals to invest a lump sum or series of payments in exchange for guaranteed payouts over a pre-specified period of time, such as 20 years or indefinitely.
The main purpose of annuities is to offer long-term financial security, especially for those looking to ensure a stable income during their retirement years. The idea is that a large sum of money can run out if managed improperly, while ongoing payouts make it easier to budget, plan for the future, and ensure that your long term financial needs are met.
At Kaia Insurance Group, we’ll help you learn more about the different types of annuities so that you can make more informed financial decisions and find the products that make the most sense for you. This is especially important because annuities can vary considerably in terms, payment amounts, requirements, and more.
Examples of the different types of annuities include the following:
Fixed Annuities
Fixed annuities are one of the most straightforward types of annuities, and likely the most common. With a fixed annuity, the insurance carrier guarantees a specific interest rate on your investment, either for a set period or indefinitely.
In return, you receive predictable, regular payments over the length of the contract, making it an ideal choice for those who prefer stability and want to avoid market risk. Features include:
- Guaranteed Returns – Offers a fixed interest rate, providing consistent growth.
- Predictable Income – Provides a steady stream of income, which can be received monthly, quarterly, or annually.
- Low Risk – Because returns are guaranteed, fixed annuities are considered low-risk investments.
Fixed annuities are best for individuals looking for a safe, predictable source of income during retirement, especially those who want to avoid the uncertainties of market fluctuations. They are especially preferred by those that want an alternative to more complicated options of money management during retirement.
Still, they are not without some drawbacks. They have lower potential returns compared to other investment options, and the fixed interest rates may not keep pace with inflation over time, potentially reducing purchasing power.
Variable Annuities
Variable annuities differ significantly from fixed annuities in that they allow you to invest in a selection of sub-accounts, similar to mutual funds. The value of your annuity – and the income you eventually receive – fluctuates based on the performance of these investments. This means your returns can be higher, but they also come with increased risk. Features include:
- Investment Flexibility – Offers a range of investment options, allowing you to choose based on your risk tolerance and goals.
- Potential for Higher Returns – Earnings depend on the performance of your chosen investments, which could lead to higher payouts.
- Death Benefit – Many variable annuities offer a death benefit, ensuring that your beneficiaries receive a minimum payment even if your investments underperform.
The potential for higher returns is often appealing but it is that death benefit that some variable annuities have that make people consider it. Those that are also not yet retired may find market-based annuities a more interesting choice, as they can build value while you are still working.
Still, like all of these products, there are downsides. They have higher fees and expenses compared to other annuities due to investment management and insurance costs, and income is not guaranteed, making it less suitable for those who need predictable payments.
Indexed Annuities
Indexed annuities offer a middle ground between fixed and variable annuities by providing returns linked to a specific market index, such as the S&P 500. While your returns depend on the performance of the index, there is typically a guaranteed minimum interest rate, which means you won’t lose money even if the market performs poorly.
You can earn returns based on the performance of a market index, offering more growth potential than a fixed annuity, and yet most indexed annuities also offer a guaranteed minimum return, safeguarding your investment from negative market movements.
Indexed annuities do tend to have caps and participation rates, which can limit how much you earn, and are some of the most complex types of annuities available, so those that want to understand what they’re purchasing may find them a bit too overwhelming.
Immediate Annuities
Although most people purchase annuities for retirement, there are other forms of annuities as well. For example, immediate annuities are designed for those who want to convert a lump sum of money into a steady income stream right away. Upon purchasing an immediate annuity, you start receiving payments almost immediately, typically within a year.
These annuities are often used by retirees who want to ensure they have a guaranteed income for the rest of their lives or for a specified period. They may also be used by those that have received some large sum – for example, a settlement payment or inheritance – and want to turn that into an income stream rather than put it in other investments.
These annuities can be a great option for those that want reliable, instant income, and they are more likely to have a lifelong payout option – thus reducing the risk of outliving your savings – but lack liquidity and may not adjust for inflation.
Deferred Annuities
Deferred annuities are similar products, but used for those that want their annuity to potentially earn on an investment first before using it. There are both fixed and variable deferred annuities, meaning you can choose between guaranteed returns or investment-based growth. Deferred annuities are often used as a way to build a larger income stream for retirement.
Benefits include:
- Tax-Deferred Growth – Your investment grows tax-deferred until you start receiving payments, allowing your money to compound over time.
- Flexible Payout Options – Choose when to start receiving payments based on your retirement needs.
- Multiple Investment Options – Deferred annuities can be fixed, variable, or indexed, offering a range of choices to suit your investment preferences.
Younger people that received a settlement may find this type of product intriguing, as it may increase their retirement savings on its own while you’re still working, and then provide that monthly income stream needed during retirement.
However, once in the annuity, it also cannot be accessed without hefty fees, so those that may require access to capital may find these products less desirable.
Choosing the Right Annuity for You
The variety of annuities available allows individuals to select a product that aligns with their financial goals, risk tolerance, and retirement planning needs. Whether you prefer the stability of fixed annuities, the growth potential of variable or indexed options, or the immediate income provided by an immediate annuity, each type serves a unique purpose.
Still, there is a lot to navigate, and everyone’s individual situation is different. If you’re in the market for annuities, and would like to learn more about the different options that are available, please reach out to Kaia Insurance Group LLC, today. We service the entire state of Texas, with in-person consultations available in Conroe, TX, Houston, TX, and Austin, TX for those ready to learn more.
