Five Types of Annuity

An annuity is a contract between you and an insurance company that agrees to provide you with future or immediate income, usually in the form of regular monthly payments. Depending on the type of annuity, you can also choose to receive your future disbursement as a single lump sum. The length of time your annuity pays out depends on your personal preference, such as on a 10-year, 15-year, or lifetime basis.

The purpose of an annuity is to supplement your other retirement income, like your Social Security or 410(k) benefits. Therefore, even if your primary retirement funds run out, you will still have a supplemental income stream to rely on. An annuity is similar to a 401(k) as well. First, the funds that you collect in your annuity are tax-deferred. Also, you can only withdraw from your annuity account without a penalty (the monetary fee for withdrawing early) after you turn 59 1/2 years old.

There are several types of qualified and non-qualified annuity accounts to consider that can fit your needs. This overview provides insight into the five types of annuities so that you can determine which option is best for you.

Fixed Annuities

A fixed annuity guarantees you a predetermined or “fixed” amount that you will receive either in regular payments or as a single disbursement. Unless your annuity is an immediate annuity, you'll receive these payments at some point in the future, such as in 10 years or after you turn 59 1/2 years old.

Variable Annuities

With a variable annuity, you invest in a portfolio of mutual funds that provide you with different levels of return. The performance of your portfolio ultimately determines how much your annuity accounts grow, which can affect how much you receive in income when you start withdrawing your contributions.

Fixed-Indexed Annuities

Fixed-indexed annuities are long-term and tax-deferred investments that provide you with a guaranteed rate of interest over a specific amount of time as well as possible additional interest based on the broad market index. While a fixed-indexed annuity can offer you more earning and growth potential than a fixed annuity, there's also less potential return than a variable annuity because of the lower investment risk.

Immediate Annuities

An immediate annuity begins paying out as soon as you make a lump-sum contribution to the account. If you're over the age of 59 1/2, you won't need to worry about early withdrawal penalties. Additionally, you can choose a fixed or variable immediate annuity, depending on your specific needs.

Deferred Annuities 

Deferred annuities are income payments you receive in the future. With a deferred annuity, you and the insurer schedule a date in the future that you want to receive your payments. Additionally, deferred annuities give your funds time to mature, and your earnings are tax-free, just like a 401(k) or IRA, until you start withdrawing.

Whether you're looking for secure, lifetime income payouts, an immediate return, or a way to grow your investments, an annuity can be a highly advantageous tool to pair with your primary retirement funds. With the right annuity for your financial needs, you can feel secure about your retirement.