Examples of Annuities

Annuities can provide retirement income for the rest of your life.
Annuities can provide retirement income for the rest of your life. (Image: investment image by Kit Wai Chan from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Are you looking for a way to save for retirement? One option is an annuity--a retirement savings plan that is similar to a Certificate of Deposit or savings account at a bank. Annuities are backed by insurance companies and you can choose from several types. The type that will work best for you depends on the kind of return on your investment you are looking for and when you want to start receiving your annuity payments.

Deferred Annuity

Deferred annuities are usually funded with a deposit of a lump-sum payment that earns interest until you begin receiving monthly payments. The interest earnings on this annuity are tax-deferred,l which means that they are not taxed until you start receiving income. The interest will compound much faster because it is not being taxed and you can get a higher return on this type of annuity as opposed to what you would get from a regular savings account or Certificate of Deposit. Deferred annuities are set up to provide you with income for the rest of your life.

Fixed Annuity

If you are not much of a risk-taker and want to make an investment that will provide a guaranteed return, a fixed annuity would work for you. Fixed annuities have a guaranteed rate of return over the duration of the annuity and are basically risk-free. The insurance company that issues the annuity will guarantee the interest rate for a certain length of time. Once the time period is complete, the insurance company will set a new interest rate that is guaranteed not to fall beneath the minimum rate set in your policy. Fixed annuities can also be deferred until you decide to take monthly payments and the accumulating interest is tax-deferred.

Immediate Annuity

Immediate annuities provide income as soon as you make a lump-sum deposit. People who acquire large sums of money at once--as from an inheritance, lawsuit or lottery winnings--often choose to place these funds in an immediate annuity. The payments will be distributed by the insurance company and are guaranteed for the length of time you agree on. You will know the amount of your payments upfront as well as whether they will be made over a period of years or for the rest of your life. Your rate of return is guaranteed and there is no risk involved.

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