Although Annuities have been around for approximately 350 years, most of that time Annuities have been the exclusive province of the wealthy. In the past 15 years or so, because of the financial benefits of Annuities, they have seen tremendous growth and are being purchased more and more by citizens with modest financial means. Consequently, the popularity of Annuities has exploded with record numbers of people looking for a safe alternative to saving their money.
An Annuity is a savings account provided by an insurance company. Annuities fall into 3 categories. Variable, Immediate, and Deferred.
Variable Annuities (VA) are investments and carry risk. Usually, they are invested in security vehicles such as stocks, bonds, and mutual funds. Since it is a security, and consequently carry risk, it is also accompanied with a prospectus. Due to the complexity of VAs, it is not uncommon for the prospectus to be as long as 1,000 pages. Because the holder of this product assumes the risk, it is rarely recommended for older individuals or those who seek safety of their retirement funds. You can lose money with Variable Annuities. They are extremely complicated and difficult for even seasoned advisors to fully understand them. We usually do not recommend these products for people close to retirement or already retired.
Single Premium Immediate Annuities (SPIA) provide guaranteed payments for the remainder of your life or a specific period of years (Period Certain). You give the insurance company a lump sum of money and the insurance company calculates how much they are willing to provide to you in guaranteed payments. The payments you will receive is based on your age and the amount of premium you’ve given to the insurance company. It is possible to increase your payments by taking the money for a period shorter than an expected lifetime.
These Annuity products have a wide range of options. For example, you can use them for pure savings growth, or as a vehicle to enhance the death benefit to heirs, or use it as future guaranteed income. Tax-deferred growth enables growth without being taxed until you withdraw funds. You cannot ever lose your money with a deferred annuity and due to that fact and other benefits like lifetime guaranteed payments, inheritable money for heirs, and access for lump sum withdrawals, they are usually highly recommended for most people seeking an Annuity. Deferred Annuities can be Fixed or Fixed Index (FIA), Equity Index (EIA), and Deferred Income (DIA) Annuities. A new term that has become popular with the public is Hybrid Annuity. However, no insurance company actually sells a product under that name.