Annuity Types
With Pros and Cons
Annuities Are Self-Created Pension Products
Below are the standard annuity types with their basic advantages and disadvantages. There is much more that could be shared about any of these and there is certainly much more info about them available to you either through the Internet, an article or a book. When considering any type of annuity, do your homework and learn about them.
SPIA (Single Premium Immediate Annuity): As the name describes, you purchase a SPIA with one lump sum of money and can’t add to it later. Yes, you can purchase another annuity if you want more guaranteed income.
- Advantages
- Contractually guaranteed
- Lifetime income stream (can also do a period certain like 10 or 20 years)
- Inheritable: any remaining balance can be passed on to your heirs
- Pretty basic with no annual fees
- No market risk
- Little to no tax consequences
- Low commission to selling agent
- Disadvantages
- Doesn’t grow in value
- Irrevocable
DIA (Deferred Income Annuity): Also known as a Longevity Annuity. It provides a future pension or income stream.
- Advantages
- Contractually guaranteed
- Lifetime income stream (can also do a period certain e.g. 10 or 20 years). Designed to help keep you from outliving your money later in life.
- Inheritable: any remaining balance can be passed on to your heirs…so your original principle amount is protected.
- Pretty basic with no annual fees
- No market risk or attachment
- Tax-Deferred: Deferring taxes accelerates savings growth because interest compounds faster without withdrawals needed to pay taxes. Interest earned in a deferred annuity is not taxed until withdrawn.
- Low Commission to selling agent
- Disadvantages
- Doesn’t grow in value: if you need market growth or interest, then consider another option
- Illiquid
- Surrender charges
QLAC (Qualified Longevity Annuity Contract): A QLAC is simply a Deferred Annuity that is purchased using “qualified” funds from your 401K or IRA.
- Advantages
- Conservative, simple, fairly easy to understand
- Guaranteed income later
- No annual fees
- Favorable tax deferred benefits through RMD (Required Minimum Distribution) delay to age 85. Check with your accountant about any potential tax benefits and consequences. Just because you can kick the tax can down the road doesn’t mean you should!
- Return of premium if you die before income starts. After you die, depends on different factors. Check before you buy.
- Ability to add spouse. Income continues after first spouse dies.
- Disadvantages
- Illiquid
- No growth if deferred
Fixed Annuity
- Advantages
- Guaranteed interest rate…typically one year at a time
- Conservative
- Can add money to the policy at any time
- Disadvantages
- Low interest rate potential: guaranteed interest rate is based upon current market rates and conditions
- Not as great a return potential as compared to a Fixed Index Annuity
Fixed Indexed Annuity: Is an annuity that earns interest based upon an external market like the S&P 500 (or NASDAQ, Dow, Russell) without your money actually being invested in the market.
Two Stages:
- Accumulation
- Distribution
- Advantages
- Growth/Accumulation potential: Because you can earn interest, your Fixed Indexed Annuity can go up in value.
- No downturns: You don’t receive all the market gains, but you don’t lose anything when the market declines.
- Conservative
- No to little fees
- Income for life: A “paycheck for life” as some say
- Tax deferral
- Shields a portion of your assets from crucial retirement unknowns
- Next recession or bear market?
- Will I outlive my money or maintain my lifestyle?
- Can I afford care if my health declines early in retirement?
- Nursing Home multiplier/doubler available
- Legacy benefit options
- Disadvantages
- Inflation/Loss of buying power: Almost every investment suffers from the effects of inflation. Historically stock market returns have outpaced inflation…thus keeping you ahead. With you money held in an annuity, you will not be able to reap the same historical returns of the stock market and that can cut into your buying power later.
- Surrender charges
- Limited growth
- Maybe higher commission to selling agent
MYGA (Multi Year Guaranteed Annuity)
- Advantages
- CD like
- Single/one-time premium
- Guaranteed fixed interest rate for certain period of time
- Grows tax-deferred…unlike a CD
- Little to no fees
- Low commission to selling agent
- Can transfer to another annuity at the end of the term
- Disadvantages
- Potential for sneaky auto-renew
- Surrender charges
Variable Annuity: Annuity funds
- Advantages
- Income
- Tax-deferred
- Greater growth potential than a Fixed Index Annuity
- Protected from creditors (not in all states, so check)
- Avoids probate
- Disadvantages
- Greater risk: Account could go down in value
- More complex
- Fees, did I say fees?
- Greater tax consequences
- Higher agent commission
For a good review and guide to Variable Annuities, see theSEC (Securities and Exchange Commission) guide: https://www.sec.gov/investor/pubs/sec-guide-to-variable-annuities.pdf
Important Notice: The information published on this web site is first and foremost, educational in nature and is not intended to be a recommendation to purchase an annuity or any specific insurance or financial product. You are strongly urged to consult with financial planning, tax, and legal advisors to determine if an annuity is suitable in your financial situation. Annuities are not deposits of or guaranteed by any bank and are not insured by the FDIC or any other agency of the U.S. government. All annuity guarantees are subject to the financial strength of the insurance company.
