Annuities are a type of financial product offered by insurance companies designed to provide a steady income stream, typically for retirement. They are considered fixed-income investments because they offer predictable payments under certain conditions.
Types of Annuities
1. Based on Payment Start Time
- Immediate Annuities:
- Payments begin right after the initial investment.
- Suitable for retirees needing income right away.
- Deferred Annuities:
- Payments start at a future date, allowing the investment to grow.
2. Based on Payout Options
- Fixed Annuities:
- Provide guaranteed payments for a specified term or for life.
- Payments remain constant, making them predictable.
- Risk: Low; typically tied to the insurer’s financial strength.
- Variable Annuities:
- Payments fluctuate based on the performance of underlying investments (mutual funds, ETFs).
- Potential for higher returns but comes with investment risk.
- Indexed Annuities:
- Payments are linked to a stock market index (e.g., S&P 500).
- Offer a minimum guaranteed return along with potential gains tied to index performance.
- Moderate risk and return.
3. Based on Payout Period
- Life Annuity: Provides income for the rest of your life.
- Joint Life Annuity: Covers two lives (e.g., you and a spouse), continuing payments after one person passes.
- Period Certain Annuity: Payments are guaranteed for a specific number of years, even if the annuitant passes away.
- Lifetime with Period Certain: Combines lifetime income with a guaranteed minimum payout period.