Types of Annuity and Payout Options

While annuity is a common word often thrown around when talking about life insurance, it deserves attention of its own. An annuity is a life insurance product that produces income for the life insurance policy owner. Basically, you put money down and the insurance company in turn provides you with your principal, plus interest, very similar to how a loan works; however, it is the consumer reaps the benefit of the interest from annuities.

Annuity Basics

There are two different types of annuity options, which will determine when you will have access to the fruits of your investment.

Immediate annuities pay out immediately. You make the purchase and your stipend begins right away, based on a payment schedule.

Deferred annuities start to pay out after a deferment period, stipulated in your policy contract. You can make payments toward the annuity during the deferment period. The amount you put in and the length of the deferral period will affect your return.

Annuity Payout

A life annuity pays out periodically during the annuitant’s life, which makes it a good option for those who are concerned with the hazard of outliving one's savings. However, if annuitant dies young, he/she might not have recovered his cost basis (indeed, might not not have begun the pension at all) and so forfeits money.

A period certain annuity pays out fixed amounts for a certain duration (e.g. 10 years).

A lump sum payout is available, but the payoff will be lower than an annuitized pension for your life expectancy.

Interest Earned

The interest you generate is based on the type of annuity product you buy.

Fixed annuities' interest is based on the specifics of your contract and payment amounts are fixed.

With variable annuities, your interest depends on the interest that your investments generate. You decide where your money is invested and your interest rate varies based on the performance of the investments.

For indexed annuities, your interest is based on the performance of a particular index, for example a stock market index.