How to Compare Variable Annuities and Immediate Annuities With Other Options

With so many different types of annuities, simply reading all the names might confuse you. It doesn't have to be that hard. The names of the various types of annuities often imply exactly what the annuity does or how you invest the money on the interior of the annuity.

You have so many different names of the products themselves. Ignore their commercial name and simply focus on the type of annuity to make the process easier. Are the products fixed annuities, variable annuities or indexed annuities? Those are the three main types of annuity products. Everything else is a variation of those three.

Fixed annuities pay a fixed interest rate. Often these products offer a guaranteed higher interest rate for the first few years. They also have a guaranteed lowest possible rate. Even if the interest drops dramatically, the company promises to pay at least that amount. In the mid 2000's, interest rates dropped to 1 percent and less. People added money to their fixed annuities because of the guarantees of at least 3 percent return. Companies, however, lowered their guarantee on their newer products.

Variable annuities offer the opportunity to not only take advantage of the economic conditions but also guide your investments. Often these contain mutual funds from several different companies. The investor gets to select the funds and the amount he wishes to invest. For those that feel uncomfortable selecting funds, companies offer groups of funds and target them by the amount of risk. The company balances these on a regular basis to maintain the same level of risk. For people near retirement, often a blend of fifty percent stock and fifty percent bonds is the standard investment.

Indexed annuities use a specific market indices as the key to their payment. In the case of those indexed to the S&P 500, the owner of the policy receives a percentage of the growth of the stock market if the S&P 500 climbs. If the market drops, however, they don't get a percentage of the loss. They receive, instead, the guaranteed interest rate offered in the policy. Often this is lower than the going interest rate, but still very palatable when you consider the other option, a loss.

Other ways companies classify the annuities is how you take your money from the policies. If you put in money and immediately begin to take an income for a fixed period, a specific amount or the rest of your life with or without guaranteed return of principal, the product is an immediate annuity.

Deferred annuities are tax-deferred products that simply act as a method of savings until you select a way to take your funds later. If you decide never to take the money, it goes to the beneficiary you name on the policy.

You can have immediate annuities or deferred annuities that are variable annuities, index annuities or fixed annuities. The variable annuities often offer the option of varying the payment when the market increases once you annuitize the product. Younger people that use this vehicle for a lifetime of income benefit from this inflation fighting quality.

Jonathan M. Tyler shares his knowledge of annuities on a weekly basis, through his articles and through our website. Click on the link to learn more about immediate annuities and the other annuity options.

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