Types of Annuities

Annuities come in various types, structured according to several factors such as the duration of time payments are guaranteed to continue. For instance, annuities can be designed to pay out as long as the annuitant or their spouse (if survivorship benefit is selected) is alive. Alternatively, payments can be set for a fixed period, like 20 years, regardless of how long the annuitant lives.

Two common categories of annuities are immediate and deferred annuities.

The immediate payment annuity starts paying out as soon as the annuitant deposits a lump sum. On the other hand, deferred income annuities don't pay out immediately but commence at a specific age the client selects.

Depending on the type of annuity, it may or may not be possible to recover a portion of the principal invested. With a lifetime payout annuity, there is no refund of the principal, and payments continue until the beneficiary dies. In contrast, a fixed period annuity may entitle the recipient to a refund of any remaining principal, or the heirs of the annuitant if they have passed away.

Annuities can also be broadly classified into fixed and variable categories:

Fixed annuities provide regular payments at set intervals to the annuitant. The payments remain the same, regardless of how the investments perform.

Variable annuities, on the other hand, allow the owner to receive larger future payments if the annuity fund's investments perform well, but smaller payments if the investments perform poorly. This setup provides for a less stable cash flow than a fixed annuity but offers the potential for strong returns from the fund's investments.

Although variable annuities carry market risk and the potential to lose principal, contract owners can add riders and features for an additional cost. These riders can turn the variable annuity into a hybrid fixed-variable annuity, offering the best of both worlds. For example, upside portfolio potential can be combined with a guaranteed lifetime minimum withdrawal benefit if the portfolio value drops.

Other common riders include a death benefit, which adds a death benefit to the agreement, and an accelerated payout rider, which allows the annuity holder to receive payouts early if they are diagnosed with a terminal illness. The cost of living rider is another popular option that adjusts the annual base cash flows for inflation based on changes in the consumer price index (CPI).