Types of Annuities

Fixed Annuities

A fixed annuity guarantees a specific interest rate on your money for a set period, typically 3-10 years. Think of it as similar to a bank CD, but issued by an insurance company and with tax-deferred growth.

Your principal is protected — you cannot lose money in a fixed annuity (as long as the issuing insurance company remains solvent). The trade-off is that your growth potential is limited to the declared rate.

Variable Annuities

Variable annuities invest your money in "sub-accounts" — essentially mutual fund-like investment options that you choose. Your returns depend on how those investments perform, which means your annuity value can go up or down with the market.

Variable annuities typically come with more fees than other types, including mortality and expense (M&E) charges, administrative fees, and investment management fees. However, they offer the highest growth potential and many include optional riders that can guarantee a minimum income regardless of market performance.

Fixed Indexed Annuities

Fixed indexed annuities (FIAs) offer a middle ground between fixed and variable annuities. Your returns are linked to the performance of a market index (like the S&P 500), but with a floor — typically 0% — that protects your principal from market losses.

The trade-off for this downside protection is that your gains are usually capped or limited by a participation rate. For example, if the index gains 15% and your cap is 8%, you'd be credited 8%. If the index loses 20%, you'd be credited 0% (not negative).

FIAs have become very popular because they offer a compelling combination: you participate in some market upside without risking your principal on the downside.

Immediate Annuities

With an immediate annuity (also called a Single Premium Immediate Annuity or SPIA), you make one lump-sum payment and begin receiving income almost immediately — typically within 30 days. There's no accumulation phase; you go straight to the distribution phase.

Immediate annuities are the simplest type. You give the insurance company a lump sum, and they calculate a monthly payment based on your age, gender, interest rates, and the payout option you choose (life only, life with period certain, joint life, etc.).

Deferred Annuities

Deferred annuities have an accumulation phase before the income phase begins. You put money in now, let it grow tax-deferred, and start taking income at a future date — often years or even decades later.

Fixed, variable, and indexed annuities can all be structured as deferred annuities. The "deferred" label simply means you're postponing the income phase. This can allow for significant growth over time, especially with the power of tax-deferred compounding.

Comparison Table