What You Need to Know
- The three classes of fixed annuities are fixed immediate, fixed deferred and fixed deferred income.
- For both types of variable annuities, the value of the contract varies with the performance of the “separate accounts” chosen.
- “Separate accounts” in a variable immediate or deferred annuity are investment accounts, similar in some respects to mutual funds.
What is an annuity?
Strictly speaking, the term “annuity” refers to a series of payments over time in which the principal (or purchase price) and interest are amortized over the payout period, so that no value remains at the end of the annuity period; it is a stream of income.
However, most people who use the term “annuity” are referring to an annuity contract, under which that stream of income is guaranteed. There are several types of annuity contracts.
1. What are the types of annuity contracts?
There are several types of annuity contracts: (1) commercial annuities, which are contracts between a purchaser and an insurance company, (2) charitable gift annuities and (3) private annuities. When people talk about “annuities,” they are referring to commercial annuities. There are many types of commercial annuities, and they are very different because they are designed to do very different jobs.
2. When do annuity payments begin?
3. How is the contract value invested?
It depends on whether the annuity is fixed or variable:
4. What is a fixed annuity?
A fixed annuity is an annuity contract in which the value is reckoned in fixed units (in the U.S., U.S. dollars). There are three classes of fixed annuities: (1) fixed immediate annuities, (2) fixed deferred annuities and (3) fixed deferred income (“longevity”) annuities.
5. What is a fixed immediate annuity?
A fixed immediate annuity is one that pays a defined amount of income each period (which ma be level or increasing in accordance with a “cost of living” provision), commencing no later than one year after purchase, and persisting for a defined period (which may be the lifetime(s) of the annuitant(s)).