Types of Annuities

Choosing the right annuity starts with understanding how these different types compare in terms of growth potential, protection, and income guarantees. Fixed Index Annuities (FIAs) are designed to balance moderate growth opportunities—linked to a market index—with full principal protection, making them a strong fit for those seeking both security and upside potential in retirement.

This table offers a side-by-side comparison of the main annuity types, highlighting key features and how each addresses growth, protection, and risk.

Five Primary Annuity Types:

• Immediate annuities (SPIAs)
• Multi-year guarantee annuities (MYGAs)
• Fixed annuities
• Fixed index annuities
• Variable annuities

Annuities generally fall into two categories: immediate and deferred. Aside from immediate annuities, all others are considered deferred. They can also be classified as fixed or variable and differ in how they credit interest. For those seeking a conservative option with growth potential, a fixed index annuity might be ideal.

Immediate Annuity

Often, individuals opt for an immediate annuity—also known as a single-premium immediate annuity—by making a one-time lump sum payment. This method secures a fixed income for life, with some plans extending payments for a period after death.

Fixed Annuity

A fixed annuity provides a guaranteed payout. During the accumulation phase, your funds earn interest at rates set by the insurer, with a guaranteed minimum rate. Once the payout period begins, your income is typically fixed and remains unchanged.

Fixed Index Annuity

A fixed index annuity combines the stability of a fixed annuity with the potential to earn interest based on an equity index—such as the S&P 500®. Although it reflects market trends, your principal is protected from downturns. The insurer guarantees a minimum interest rate regardless of negative index performance, and these products offer tax-deferred growth along with flexible income options and possible income riders.

Variable Annuities

Variable annuities feature an investment component, where your premiums are allocated into separate accounts according to your risk tolerance. You can invest in stocks, bonds, or opt for a fixed account with a minimum guarantee. However, choosing the investment route means your principal and interest may fluctuate with market performance. Some riders provide minimum guarantees for income or interest credits, so consulting a financial professional is advisable—especially if you seek a safer investment option.

Multi-Year Guarantee Annuities

Also known as fixed rate annuities, multi-year guarantee annuities involve a predetermined payment—often a lump sum—that the insurer guarantees will grow at a specified compound interest rate over several years. This fixed rate is maintained throughout the surrender period, during which early withdrawals usually incur penalties. In contrast, fixed annuities may use a banded rate for a set time before switching to a variable renewal rate.

What are Some Benefits of Fixed Deferred Annuities?

One significant advantage of deferred annuities is the option to convert accumulated value into either a lump sum or regular income payments—typically monthly, though other intervals may be chosen. The payment amount depends on the accumulated value and the benefit rate in effect when payouts begin. This benefit rate, influenced by factors such as age, gender, and the chosen payout option, will never fall below the guaranteed level. Multiple income payment options are available to suit your needs.

Fixed Deferred Annuity Income Payment Options

• Life only: The insurer provides income for your lifetime only, with no subsequent payments after death. This option is ideal for those without dependents or who have other support, typically offering the highest income level.
• Life annuity with period certain: This option guarantees lifetime income along with payments for a set period (often 10 or 20 years) even if you pass away. If you outlive the period, payments continue until death; if you die during the period, your beneficiary receives the remaining payments. Note that this option generally results in lower payments compared to the life-only option.
• Joint and survivor: Income is provided as long as either you or your beneficiary is alive. You might choose to reduce payments after your death or set a fixed duration. This feature typically leads to lower payments than the life-only option.

What’s the Takeaway?

Each annuity is unique in its structure, so it’s crucial to choose one that aligns with your financial goals and situation. Understanding both the benefits and limitations is key before making a decision.

Be sure to ask your advisor the right questions:

• Is this a single premium or flexible premium contract? In other words, does it require a one-time lump sum or multiple payments?
• Is this a scheduled premium or flexible premium annuity contract? What are the specific terms?
• What kind of annuity is it?
• What is the initial interest rate, and how long is that rate guaranteed?
• Does the initial rate include any bonus, and if so, what is its value?
• What is the guaranteed minimum interest rate?
• What renewal rate is being credited on similar annuity contracts issued previously?
• Are there any withdrawal or surrender charges if I terminate the contract early? If yes, what are the costs?
• Is it possible to make a partial withdrawal without incurring surrender charges for events like death, nursing home confinement, or terminal illness?
• Does the annuity include a market value adjustment (MVA) provision?
• Are there any additional fees deducted from the premium or contract value?
• Will choosing a different payout period or surrendering the annuity affect the accumulated value or interest crediting method?
• Is a death benefit provided for estate planning purposes? How is it determined, and is it subject to change?
• What income payment options are available, and can the chosen option be modified later?