Annuity Insurance


Annuities are a life insurance product that can help provide a guaranteed income stream during your retirement years. While there are several different types of annuity products (discussed more below), all annuities are contractual arrangements. Most annuities have two distinct, and very different, phases.

Accumulation Phase

The “accumulation phase” refers to a period of time where the owner/annuitant can deposit or invest premium dollars into the annuity, and withdraw lump sums from it. In fixed annuities, the insurance company issuing the annuity credits the policy with a fixed interest rate, and your funds grow tax-deferred. Because the earnings are not taxed, this can help you accumulate retirement savings faster.

When you “annuitize” an annuity, you turn a lump sum of money into an income stream. The period of time over which payments are made is referred to as the “annuity period.” In most cases, annuity holders have several options for choosing how frequently, and how long, they want to continue to receive payments from their annuitized contract.

Annuity Insurance

Understanding Different Types of Annuities

There are many different types of annuity contracts to choose from; each insurance company that offers annuities may put their own spin on products, offering different benefits or penalties (such as surrender fees for a period of years after you start a new annuity contract.)

Some of the most common types of annuities include the following:

Deferred Annuity

Deferred annuities have the distinct accumulation and annuity phases discussed more fully above. An annuitant could purchase a flexible premium deferred annuity at age 30 with an inheritance, and wait until age 65 to annuitize the contract. During the 35 years between purchasing and annuitizing the contract, the money invested would be credited with a guaranteed interest rate, and would grow tax-deferred. In addition, the annuity holder would also be free to make additional deposits at any time during the accumulation phase.

Immediate Annuity

In contrast to deferred annuities, with an immediate annuity, the contract is annuitized immediately after the initial deposit (premium) is paid. The annuitant does not have the option of making additional deposits to the contract, as regular, fixed payments will begin right away based on the amount initially deposited.

Equity Indexed Annuity

Equity indexed annuities, also sometimes referred to simply as “indexed annuities,” are riskier than fixed annuities, but less risky than variable annuities. Like fixed annuities, equity indexed annuities offer a fixed, guaranteed rate of return. This is also combined with an interest rate that is tied to a market index, such as the S&P 500 Composite Stock Price Index. This can give investors a chance to earn higher interest than what they would get in a fixed annuity, without assuming as much risk as they would have with a variable annuity product.

Annuities can also be fixed or variable. In a fixed annuity, the funds inside the contract are credited with a fixed, guaranteed interest rate. In a variable annuity, the money is invested in subaccounts that are invested in portfolios of stocks and bonds, similar to mutual funds. Variable annuity returns are not guaranteed, and there is risk of principal loss.

Why Consider Using Fixed Annuities

Fixed annuities offer many potential benefits to contract holders, including:

Guaranteed interest rate which may be significantly higher than what is available through traditional savings vehicles
The ability for money to accumulate and grow tax-deferred, until withdrawn in retirement
Fixed, periodic payments from an annuitized contract can help with retirement income budgeting and expenses

Annuities may also include limitation or restrictions on the use of invested assets, at least in the early years of the contract, so it is important to understand how a particular contract works before purchasing it.

Annuity Insurance Benefits


Complex and Subject to Change

To learn more about fixed annuities and to explore whether purchasing one might help you meet your retirement goals, choose Christopher Ferguson Insurance.

Christopher Ferguson Insurance does not offer, sell or provide service for variable annuities