The first question that comes to mind about the annuity rate is which rates are the best. And the second question is which annuity rate will be best for your retirement plan.
The answer is there’s no way to compare the different annuity rates you find on the internet unless you understand the six main types of annuities these rates are advertising. This article summarizes the main features and drawbacks of each of these annuities.
Before starting anything it is important that you know about the annuity rates and what are they like. The below data will give you complete information about it. The annuity or annuity rates are divided into two categories: fixed and variable.
- Fixed Immediate Annuities
Fixed immediate annuities typically offer you a ‘fixed’ income stream for the duration of your lifetime by paying you some of your original principal plus earned interest each month.
This kind of annuity is used to produce such an income that keeps on coming throughout the lifetime of the owner. Moreover, the amount you will withdraw from this annuity will be a little greater than the amount from other annuities. The reason is clear, there is a certain risk in other annuities because of the loss factor as they are attached to stocks.
You can select whether you want immediate annuities or deferred ones. Immediate annuity income streams can be set up to pay out for a limited or specified time, for your lifetime, for you and your spouse’s lifetimes. The income stream can be delivered monthly, quarterly, semi-annually, or annually depending upon your financial needs.
Annuity rates which you will get on immediate annuities will vary depending on the age, gender, and the type of payout you are choosing. Another important point to remember is that the figure or value that you will get as a quote is actually how much income you will receive over the required time. Do not confuse it with the underlying rate of return of your investment you will earn.
- Deferred Fixed Annuity Rates
A deferred fixed annuity works similarly to a bank certificate of deposit, but it is not covered by FDIC. These annuities are offered by insurance companies and their rates are quoted as an Effective Annual Yield.
In this, they give you a guaranteed income period between three and ten years mostly, however, in many cases the time period can exceed the limit of ten years.
To help you understand the difference between the rates of fixed and deferred, always remember the following things. One, the deferred rates depend on the time period while the fixed rates depending on the age, gender, and time frame of receiving payments.
- Deferred Income (“Longevity”) Annuity Rates
Deferred Income Annuities (DIAs) combine features of both the immediate annuity and the deferred fixed annuity previously discussed. If you want to create a guaranteed income for a later date consider a DIA.
Deferred income annuities combine the investment growth period offered by the deferred annuity with a selected income period as with the immediate annuity.
The investment growth period options vary between three and thirty years depending upon the insurance company receiving quotes from. When you receive a deferred income annuity quote, you will be provided with the income stream’s start date and the ability to select designated beneficiaries.
The quote received will not state the underlying investment return but the annuity’s deferral period, your chosen income stream option, the estimated monthly or annual income stream, and the date on which this income stream will begin. It is important to note that if you die during the selected growth period, your beneficiaries may not be guaranteed to receive your investment. Be sure to read the features of the annuity contract quoted.
- Secondary Market Annuity Rates
When an investor wants to sell out an annuity it becomes a secondary market annuity. This means the investors want to sell out their future income annuity and maybe want to invest somewhere.
The people who would be buying that annuity or the insurance company that would be buying that annuity will bring a new rate for it. This new rate would be around the rate at which the investor bought the annuity for himself.
Please keep in mind, that as with immediate annuities, the annuity rate quoted on an SMA should not be confused with that annuity’s payout rate.
- Fixed Index Annuity Rates
Fixed index annuities share similar features with fixed deferred annuities; however, their annual growth is tied to a benchmark stock index versus a fixed rate of return.
An index annuity’s growth rate is subject to rate floors and caps, meaning they will not exceed or fall below specified returns even if the underlying indexes fluctuate outside the set parameters.
Describing this in simple term, it means that insurance companies will bear the risk of decline in the stock market. As they do not let the risk of decline come on the investors. Mostly the stock goes up or down around seven percent the insurance companies manage it.
- Variable Annuity Rates
The term variable tells the simple story that it will not offer you any fixed rates of return. Moreover, the performance of these annuities is tied with the market returns of the investments and stocks.
The value of these annuities keeps on changing by going up down depending on the value of the stocks. So, in this case, nothing can be said easily as the stocks sometimes make a profit and sometimes make a loss. Depending on how you look at it and decide which one to chose is your decision.
When you receive a quote or illustration for a variable annuity it will be expressed as hypothetical rather than guaranteed which is only true for fixed annuities.