Annuities are purchased by many retirees to guarantee a monthly income. Annuities are contracts between an insured person and an insurance company to provide this income. In general, annuities offer regular payments, but some can be arranged to pay lump sums of money at designated points in time. Annuities can be paid out over the recipient’s lifetime or for a set amount of time.
There are two types of annuities, immediate annuities and deferred annuities. In general, an immediate annuity provides immediate income while a deferred annuity builds value over time which is converted to income at a later date. One of the main differences between immediate and deferred annuities is that deferred annuities can be bought with a lump sum payment or a series of regular payments, while immediate annuities can only be purchased with a lump sum payment.
Immediate annuities are usually recommended for people with large sums of money who do not have the knowledge necessary to invest it on their own. Typically this money comes from the savings in a 401(k) or an inheritance. Immediate annuities can be set up to make payments to the insured over the course of a specific period of time or indefinitely.
There are several different types of immediate annuities. Straight life or non-refund immediate annuities guarantee payments over the lifetime of one person. These are usually purchased by single retirees in order to guarantee monthly income. Other types of annuities include period certain annuities in which benefits are paid for a specified period of time and joint and survivor annuities where fixed monthly income payments are made for the lifetime of two or more people.
On the other hand, a deferred annuity accumulates value over time and can be a good way to save for expenses such as retirement. Deferred annuities allow the insured to choose between a lump sum payment or specified payments over a specified time. Additionally, some deferred annuities allow the insured to withdraw some of the accumulated money while till making payments.
Unlike investments in the stock and bond markets, deferred annuities come with some protections. They are usually guaranteed against loss by the insurer, carry a guaranteed minimum rate of return, and most usually come with guaranteed minimum payout amounts. Benefits include tax advantages since capital gains are typically not paid on the accrued money in the annuity, no limits on contributions, and a guarantee of safety for the amount invested in the annuity.