Annuities Types Rates and How an Annuity Works

27 December, 2017

There are 4 basic types of annuities:
1. Immediate Annuity
2. Fixed Annuity
3. Fixed Indexed Annuity
4. Variable Annuity

1. Immediate Annuities
These are where you give an insurance company money today and they start paying it
back out to you 30 days from now.  They can be set up to either pay you for your entire
life, or for a certain number of years, or pay a certain amount per month till the money
runs out.  The first two methods are the most common.  With them paying you for your
entire life there are several types of refund features so that you can be sure that if you
are not around to collect the money at least one or more of your heirs will collect it over
time.  We can set it up so that someone gets an immediate refund of all monies not paid
out yet.  We can also set it up so that we know someone is going to get payments for 10
or 20 years (other options available).  The pay out rate is highly determined by the
prevailing interest rates at the time.  So right now since we are at historically low interest
rates the pay outs are not as good as they were a year ago or might be a year from
now.  For example right now $100,000  would give a female, age 65, about $503 per
month guaranteed that the payments would go to someone for at least 10 years.  I say at
least 10 years because on the other hand if the lady lived for another 25 years she
would receive those payments till she died.  A male age 65 would get $542 (females
have a longer life expectancy).  At age 75 the male would get $646 and the female would
get $607.  A couple of years ago when we had higher interest rates those numbers were
all larger.

2. Fixed Annuities
Fixed Annuities work pretty much like CD’s from a bank with a couple of major
differences.  You put the money into the annuity and it can either be on a fixed rate of
return for the entire time period or it can be on a variable interest rate that could change
on a yearly basis.  There is a guaranteed minimum rate on the variable interest rate
contracts.  Annuities are backed and guaranteed by state laws rather than federal laws
like the bank products, but they do guarantee both principle and interest which is not the
case with cd’s.  The other major difference is that you always have access to at least
10% of your money on a yearly basis, anytime after the first year.  This of course is quite
different from the rules for cd’s.  There are a few of the shorter annuities that only allow
access to the interest earned rather than the 10%.  Fixed annuities can be annuitized
and therefore provide the same benefits as the immediate annuities, usually anytime
after the first year, but they don’t ever have to be annuitized.  That feature therefore
offers a lot more flexibility. Current rates right now are about 3.% on 5 yr annuities and
3.25% for the 7 year annuity.

3. Fixed Index Annuities
The fixed index annuities work just like the regular fixed annuities and have the same
features and benefits.  The difference is in how the interest that they earned is figured
and credited.  The indexed annuities are tied to the performance of the stock market.  
When the market is doing well and going up the annuities earn money but when the
market goes down the annuities don’t earn anything but they also don’t lose anything.  
Needless to say there is a cost to everything in this world.  The cost here is that when
the market goes up you do not get all of the gain, you only get a portion of the gain.  
Currently that portion is 50% to 60%.  All in all over the last 15 years these contracts
have averaged right about 5.9% interest credited.  Now of course that means there were
some years where they earned nothing and some years where they earned as much as
12%.  So they are not real consistent in their earnings, but they have out produced the
regular fixed annuities by quite a bit.

There are no fees connected with any of the above 3 types of annuities mentioned
above.  There are however early withdrawal penalties if you do not let the contract run
for the stated amount of time.  Instead all the money the companies need to pay their
bills and stay in business is figured into the actual declared interest rates. This is not
true for the last of the 4 types of annuities.

4.Variable Annuities
A variable annuity is nothing more than a bunch of mutual funds wrapped up into an
insurance contract so as to allow tax deferred growth.  These definitely do have fees and
many times are actually quite expensive.  Also these definitely have the potential to lose
money.  They can be annuitized but at that point in time they become a fixed annuity

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