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An annuity is an investment vehicle that can be used to save for retirement. Yet, it is also commonly used for the following reasons:
- Provide a guarantee income for a specific amount of time (e.g. 5 years) or a lifetime - annuitization
- Supplement retirement income
- A death benefit for your heirs
- Guaranteed rate of return - fixed annuities
There are several types of annuities. Generally speaking, most people are familiar with the fixed annuity. A purchaser of the fixed annuity gives the insurance company a sum of money in return for a guarantee rate of return (e.g. 5% for five years). Listed below are other types of annuities:
- Variable Annuity - your money is invested in a portfolio of separate accounts that can mirror mutual, stock, or bond funds (these are not mutual funds, so the returns cannot be looked up in the Wall Street Journal under the mutual fund section)
- Equity Indexed Annuity - is an annuity that usually guarantees a minimum rate of return and allows an individual to participate in the returns based on a index (e.g. S & P 500)
When deciding to annuitize an annuity, you may have several payment options including the following:
- Immediate Annuity - you give the insurance company a sum of money and they convert it into a lifetime or period-certain income for you
- Joint Life Annuity - pays you an income until the death of the first annuitant
- Joint Life and Survivor Annuity - it pays until the death of the second annuitant (upon the death of the first annuitant, the second annuitant usually receives a reduced amount such as 50%)
- Life Annuity - this annuity pays you an income until your death
- Life Annuity with a Period Certain - it pays a guarantee income for a specific period of time (e.g. 5 years) - if you live longer, you will continue to receive payment, but it ends upon your death
