Types of Annuities

An annuity is a contract between you (the owner) and the issuer (usually an insurance company). In simple terms, you pay money to the issuer who agrees to invest this money for you and then pay the principal and earnings back to you (or your beneficiaries) at some point in time. There are two major categories of annuities: immediate annuities and deferred annuities.

Immediate Annuities

An immediate annuity is an annuity where the distribution period begins immediately (within 1 year) after the annuity has been purchased. Immediate annuities are often called income annuities because they are frequently used to create a guaranteed income stream from a given sum of money. Most often, these annuities are purchased using a single lump sum of cash, called a single premium, which is why we refer to these products as Single Premium Immediate Annuities, or SPIAs for short. For example, you retire with $100,000 in your IRA. In exchange for this money, the insurance company will guarantee you a certain monthly income--either for life or for a certain period of time (or both)--depending on your needs.

Immediate annuities can be a useful retirement planning tool, as they allow you to implement strategies to guarantee that you will never run out of income, no matter how long you live. Of course, all guarantees are subject to the claims-paying ability of the annuity issuer.

Deferred Annuities

Deferred annuities are frequently confused with immediate annuities, when they are, in fact, quite different in many ways. With the typical deferred annuity, you are also paying money to the annuity issuer, who will then invest the money for you, but the distribution of that money back to you does not start right away. Further, you will usually have options when it comes time to receive your money (and earnings). These options include: guaranteed lifetime (or period certain) income, lump sum distributions or a combination of both.

Because of their tax treatment, deferred annuities are an excellent way to save money for retirement and defer paying taxes on the accumulation until a future time.

Please contact us for a copy of Annuities In Retirement Income Planning or for additional information about any retirement planning issues.