Page 20 - Investment Advisor July/August 2022

ANNUITIES UPDATE

By Ginger Szala

Cheat Sheet: Basic Annuity Types and Facts

Every Advisor Should Know

Annuities are a basic concept: A lump sum provides steady monthly

payments. But then it gets complicated.

nnuities are becoming more
accessible through fee-only
A advisors and retirement plans.
For advisors who have clients inter-
ested in these products, here’s a quick
rundown on what types of annuities
are available and how, generally, each
type works.
Keep in mind: There are always new
wrinkles to think about. If you are new
to annuities, and you want to explain
them to clients, start by talking to your
compliance people to see what kinds of
training and advisory support you need.
Also, remember this is just a basic cheat
sheet to get you started.
Let’s start with some basics:
1. Annuities need a solid founda- lower payouts than other annuities and sum payment to the insurance company,
tion: Annuities are products sold by typically don’t have fees, but do have and once this happens, principal can’t
insurance companies, and the contracts surrender charges. be withdrawn.
typically stay in place for many years, Variable: Variable annuities include
or even for a lifetime. The key is to a separate account where money is typi- RETAIL ANNUITY TYPES
make sure the company is fundamen- cally invested in mutual funds. Payouts Contingent Deferred Annuity (CDA):
tally sound. can vary depending on the perfor- This is a new concept in which an annu-
2. All U.S. retail annuities have key mance of these underlying investments. ity is “bolted onto” a client’s portfolio.
similarities: 1) The annuity is a con- Variable annuities carry the greatest The cost varies according to fluctuations
tract between your client and the insur- risk (client could lose principal), but in the stock market. A CDA on a portfo-
ance company; 2) Money in the account could have higher payouts. Also, fees lio with higher stock allocation would
grows tax-deferred, until it’s withdrawn can be high. cost more than one with lower alloca-
(unless bought with after-tax funds); tions to stocks.
and 3) annuities provide periodic pay- 2 MAIN TYPES OF ANNUITY Multi-Year Guaranteed Annuity
ments over a specific time, for life or in PAYOUT OPTIONS (MYGA): This is a type of fixed annuity
lump sums. Deferred: This refers to when payouts designed to protect the premium and
begin. In this case, payouts are delayed accumulate interest at a guaranteed rate
2 MAIN TYPES OF ANNUITIES until a future date. This gives money in for a specific amount of time, typically a
Fixed: This refers to the size of a pay- the account time to grow. During this period of three to 10 years.
out. These are annuities in which a accumulation phase, no taxes are paid. Non-Variable Indexed Annuity:
minimal rate of interest is guaranteed, There are some fees. This is a type of annuity that that offers
and periodic payment amounts do not Immediate: In this case, payouts a guaranteed minimum rate of at least Adobe Stock
fluctuate. These are the simplest, have begin shortly after you make a lump- 0%, meaning that the the holder cannot

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