One of the most common reasons people buy annuities is to diversify their portfolios.
Are you interested in diversifying your portfolio or growing your retirement account, you might want to invest in an annuity. Before you do this, though, you’ll benefit by learning about the types of annuities you can choose.
Here is a guide to help you understand the most common types of annuities you can use.
Fixed Annuities vs. Variable Annuities
Before you can understand the different kinds of annuities, you’ll need to know the answer to this question: what are annuities?
An annuity is an investment tool you can use to increase your retirement savings or have a guaranteed stream of money in the future. You purchase an annuity from an insurance company.
There are two main types of annuities you can choose from:
So, how do annuities work? Well, it depends on the type. The first type is a fixed annuity. With this option, you buy the annuity, and the insurance company guarantees to pay you a specific amount of money.
They might agree to pay this in five years or 40 years, depending on the contract. When the maturity date comes, they must pay you the stated amount they agreed to pay when you bought the investment.
There is little risk with a fixed annuity, but there is also not much room to make money from the investment.
If you’re interested in making more money through your annuity payments, you might want to choose the second type, which is a variable annuity.
With this option, you buy the annuity from an insurance company and choose where they invest your money. The insurance company doesn’t guarantee a specific payout from a variable annuity. Instead, your payments depend on the investments you put the money in when buying the annuity.
You’ll have more risk with variable annuities, but you’ll also have the chance to earn more money from it. If you choose the right stocks or mutual funds to invest in, your investment could grow more than you expect.
Deferred Annuities vs. Immediate Annuities
After choosing a fixed or variable annuity, you’ll need to decide if you want it to be a deferred or immediate annuity. Here is an explanation of both options:
A deferred annuity pushes your annuity payments to the future. At some point in the future, you’ll receive payments from your investment. You’ll know when this is because you’ll get to choose which it happens.
Immediate annuities start providing payments to you right away. You can look into this type of annuity if you want to start receiving payments from the investment right now.
Learning the Types of Annuities Helps You Choose the Right One
As you learn about the types of annuities you can choose from; you’ll be able to pick the right one. While these are the most common types, there are also other types you can choose from.
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