Types of Annuity
An annuity is a contract with a life insurance company to provide a guaranteed income. Annuities are used for retirement savings and income after retirement. Annuity types can be classified several ways.
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Deferred Annuity
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A deferred annuity earns tax-deferred interest until money is withdrawn or the contract is converted to an immediate annuity. The interest earned in an annuity is set by the issuing insurance company. There are income tax penalties if withdrawals are made before age 59 1/2.
Immediate Annuity
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An immediate annuity pays a lifetime income to the person the contract is written on, the annuitant. A lifetime annuity will pay monthly payments until the annuitant dies. Immediate annuities can also be structured with a minimum payout time, such as 10 years, or until at least the original deposit is returned, if the annuitant dies early.
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Fixed Annuity
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A deferred annuity with guaranteed principal and earning an interest rate set by the insurance company is called a fixed annuity. The interest rate guarantee period can be from one to 10 years. After the guarantee period, the rate paid on an annuity is set by the insurance company.
Variable Annuity
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Variable annuities are deferred annuities where deposits are invested in separate accounts similar to mutual funds. Variable annuity owners have the option to select or divide their annuity money among several funds invested in stocks, bond or other securities. Variable annuities have a death benefit feature that guarantees repayment of the amount invested if the value of the funds decreases and the annuitant dies.
Considerations
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Annuities are backed by the issuing life insurance company; they do not have federal insurance. Most annuity contracts have withdrawal penalties if the money is withdrawn in the first several years.
Solution
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Annuities are appropriate savings vehicles for individuals at or near retirement who want to earn a competitive, safe interest rate that is tax-deferred.
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