Annuities Explained

Annuities are a contract you buy into to provide you with regular payments over a set period of time – or for the rest of your life, providing you a guaranteed lifetime income in retirement. Your employer may provide you with an annuity option or you can buy them through a life insurance company.

Facts About Annuities

People typically buy annuities to guarantee an income in retirement. In recent years, they have become an alternative to pensions which have been disappearing from the private sector. But annuities also provide other benefits.

why people buy annuities

Narrowing Your Annuity Choices

There are several ways to classify the various types of annuities, annuity taxation features and other qualities. You can use these classifications to narrow your choices to the type of annuity that may work best for you.

annuity classifications

Annuity Features

Annuities have features that make them particularly useful as an investment for retirement. They can ensure your retirement security and provide an income stream once you no longer have a salary.

Features of annuities

Types of Annuities

There are several types of annuities, but most fall into three basic categories: fixed annuities, variable annuities and indexed annuities.

annuity types: fixed, variable and indexed
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Our financial experts can guide you through the annuity buying process so you can focus on your retirement, asset protection or income generation.

Types of Variable and Fixed Annuities

Within these three basic types of annuities, there are several different subtypes that offer different features. Many can be purchased as either a fixed or a variable annuity.

Variable and Fixed Annuities
Fixed period annuities
A fixed period annuity pays a fixed amount of money routinely over a specified number of years. The amount of payouts depends on the amount of money put into the annuity.
Single premium annuities
A single premium annuity is purchased with a single payment. The money may be invested for growth as a deferred annuity or for a short time as an immediate annuity.
Flexible premium annuities
Flexible premium annuities are only available as deferred annuities and are purchased through a series of payments.
Lifetime annuities
A lifetime annuity provides a guaranteed income for the life of the annuitant. Another version allows a beneficiary to continue receiving an income stream after the first annuitant dies.
Qualified annuities
A qualified annuity allows you to invest and distribute money in an IRA, Keogh plan or other qualified retirement plan. Money placed into a qualified annuity is not taxable as income.
Nonqualified annuities
A nonqualified annuity is one purchased outside of a tax-favored retirement plan. Taxes are deferred until you withdraw your money from the annuity.
Josh Curtis, Independent Financial Advisor at RetireGuide.com, explains why an annuity should be part of your retirement portfolio.

Annuity Payout Options

Your annuity payout options are determined when you first purchase an annuity. There are three main options you can choose from: deferred, immediate and inherited payouts.

types of annuity payouts: deferred, immediate and inherited

Choosing an Annuity Payout Option

You have six basic annuity payout options. These determine how long you’ll receive payouts, how frequently they happen and how much each annuity payout will be.

Annuity payout options

Buying Annuities

Buying annuities requires doing research into annuity rates and companies as well as comparing the various plans available. You want to find an annuity that meets your needs and fits within your budget.

Annuity Rates
The annuity rate is the percentage amount that a particular annuity grows in value each year. Fixed annuities guarantee an interest rate for anywhere from one to 10 years at a time, based on the annuity. Variable or indexed annuities don’t guarantee a rate because growth is dependent on investment performance.

Annuity Companies

Independent broker-dealers and independent agents account for most annuity sales to individuals – a combined 44 percent of all individual annuities sold in 2020. Most of the annuities sold through these independent financial professionals included annuities from some of the most recognizable names in the insurance industry.

top 10 direct annuity providers
Josh Curtis, Independent Financial Advisor at RetireGuide, talks about whether someone is ever "too late" to purchase an annuity.

Comparing Annuities

Comparing annuities can seem confusing at first, but if you keep in mind what you want to accomplish with an annuity, you can clear much of the confusion.

Steps to Comparing Annuities
Compare benefits – not features:
Once you settle on your objective – say lifetime income – features like investments or payout schedules will fall into place more easily.
Don’t be overwhelmed by annuity types:
Different classifications and types of annuities can accomplish different goals. Know what your goal is and focus on the type that gets you there.

Talking with a financial professional can help you stay focused and present you with the best possible annuity options to compare – and ultimately reach your retirement goals.

You can also browse commonly asked questions regarding annuities when you read our annuity FAQs.

Last Modified: November 16, 2021

5 Cited Research Articles

  1. Texas Department of Insurance. (2021, August 6). Annuities Guide. Retrieved from https://www.tdi.texas.gov/pubs/consumer/cb078.html
  2. Internal Revenue Service. (2021, July 1). Annuities – A Brief Description. Retrieved from https://www.irs.gov/retirement-plans/annuities-a-brief-description
  3. Securities and Exchange Commission. (n.d.). Annuities. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/annuities
  4. Insurance Information Institute. (n.d.). Annuities Basics. Retrieved from https://www.iii.org/article/annuities-basics
  5. Insurance Information Institute. (n.d.). Facts and Statistics: Annuities. Retrieved from https://www.iii.org/fact-statistic/facts-statistics-annuities