The three types of immediate annuities are types of immediate insurance that you can compare to determine which type is best for you. Immediate annuities allow you to begin receiving payments right away after you have given your money to the insurance company. There are several ways immediate annuities operate, but the three main types are fixed annuities, inflation-indexed annuities, and variable annuities.
Fixed Annuities
In fixed annuities, you place your money in an account with the insurance company, which determines the amount of income you will receive each month. The amount set by the company remains constant throughout your annuity contract. Using a fixed immediate annuity as part of your retirement income plan can increase the likelihood that your retirement income will last throughout your lifetime. Since your money is controlled by an outside party – the insurance company – you are guaranteed to have retirement funds because you cannot withdraw from the account.
Inflation-Indexed Annuities
Also known as inflation-protected annuities, these provide a guaranteed stream of income from the insurance company for the rest of your life. The difference is that payments increase or decrease each year, considering the inflation rate. Inflation-protected annuities track standard inflation measures – usually the Consumer Price Index (CPI). Monthly income gradually adjusts with CPI. Because money loses purchasing power with inflation, tracking the inflation index theoretically allows your funds to maintain that power with the fluctuations of inflation. However, inflation-protected annuities start with smaller payments initially compared to a fixed payment plan. It takes a long time to compensate for inflation-related income, meaning there is a clear risk of reduced lifetime payments if you die before compensation occurs.
Variable Annuities
With variable annuities, the amount of income you will receive depends on the performance of an underlying investment portfolio, usually mutual funds of stocks and bonds. This means your payment will change each month or may change at least once a year, depending on how the annuity is structured. Immediate annuities aim to provide guaranteed income you can rely on, while variable annuities lack reliability as payments can fluctuate.
Which Type is Best for You?
Immediate annuities are an option for individuals who have enough savings to put into an account. The right choice depends on your retirement goals and financial circumstances. The fixed payment of immediate annuities makes more sense if you want to add it to your retirement income plan. It creates a floor of guaranteed income you cannot live without. If you are concerned about rising inflation later in life, the inflation-protected product can safeguard your funds, but there is a risk of reduced payments compared to other types of insurance. If you want to increase the value of your annuity, the variable annuity that tracks stock indices is an excellent choice because your income can increase over time if the underlying stocks perform well. The risk you take is that stock prices may fall, leading to reduced payments.
Source: https://www.thebalancemoney.com/comparing-immediate-annuities-2388588
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