There are a variety of variable investment annuities. Imagine the whole annuity market as a type. In this article, we’ll slice it once, right down the middle, followed by other smaller types within the two largest categories.
The Two Largest Categories
There are two broad categories of variable investment annuities, deferred annuities and immediate annuities. Deferred variable annuities are those that can appreciate in value before payouts begin. Immediate variable investment annuities are annuities that begin payouts immediately after the contracts are signed.
Subsets of Deferred Annuities
There are two other types within the deferred annuity type. These are the periodic-payment deferred annuity and the single-premium deferred annuity.
Periodic-payment deferred annuities allow an investor to build up a position in an annuity over time by making a series of periodic payments. These are very much like your classic pension program where you invest a certain amount of money periodically and receive a fixed monthly payout upon reaching retirement age.
Single premium deferred annuities are one time deals in which you invest a certain amount and no more is added before reaching retirement age. Often, these are purchased near retirement age to allow some time for growth before regular monthly payments commence.
Both types of deferred annuities have an accumulation phase built in where capital can appreciate in value. Also, you’ll be able to decide before retirement how the payouts should continue upon your death, or whether you’d prefer survivors to receive a lump sum. Many investors like this feature, since they can prepare for retirement, as well as have ample cash to pay for funeral costs and other post-death expenses.
Immediate variable investment annuities are quite simple when compared to deferred annuities. In an immediate investment annuity, the payout begins immediately after the contract is written. However, since they are variable, the payout can rise, but never fall, from year to year.
Immediate annuities are usually tied to the change in value of popular stock indexes, mutual funds, or a selection of each. The most common are the most simplistic, and often based on the S&P 500 index rather than other indexes like the Dow Jones Industrial Average or Nasdaq composite.
Benefits to each
Both immediate and deferred annuities grow tax free until withdrawals. Deferred annuities incur a tax burden as money is withdrawn, whereas immediate annuities incur a tax burden immediately and the total tax cost rises as the value of the principle increases.
Be advised that the IRS is very finicky when it comes to taxes on annuity income and capital appreciation. Money drawn from an annuity before the threshold age of 59 and ½ years old is subject to a 10% penalty from the IRS. Insurance companies, too, can have their own preset charges for early withdrawals starting as low as 6 percent and rising well into the low double digits.
Though at first glance annuities may appear to be complex instruments, they are perhaps the most simple of any financial product. You’ll find that after cracking the surface, what you have is a retirement plan that is simplistic, consistent, and malleable enough to fit any retirement portfolio.