The main types of annuity, explained
Fixed, fixed indexed, variable, immediate, deferred. What the categories mean, and which regulator oversees each.
An annuity is a contract with an insurance company: you pay in, and it pays out on agreed terms. The word covers products that behave very differently, so the category matters more than the name on the brochure.
When payments begin
An immediate annuity starts paying shortly after purchase, usually bought with a single premium. A deferred annuity accumulates first and pays out at a chosen later date.
How the value grows
- Fixed. The insurer credits a stated rate. Predictable, and the guarantee rests on the insurer’s ability to pay.
- Fixed indexed. Interest is linked to an index, subject to caps, participation rates, or spreads that limit both gain and loss. The mechanics of those limits are the product.
- Variable. Value depends on underlying investment subaccounts and can fall. Variable annuities are securities, so whoever sells one must hold a securities registration as well as an insurance licence.
Riders
Optional features — guaranteed lifetime withdrawal benefits, death benefits, long-term care provisions — are added by rider and carry their own annual cost. They are frequently the reason one contract is chosen over another, and frequently the part least well explained.
Terms worth having defined before signing
Surrender period and surrender charges, free withdrawal amount, cap or participation rate, rider fees, and how the payout is calculated. If any of those cannot be explained in a sentence, that is worth noticing.
This guide is general information, not financial, insurance, tax, or legal advice. Rules vary by state and by individual circumstance. Speak to a licensed professional about your own situation.