An annuity is a special contract issued by an insurance company. While it is not an insurance policy, there are similar characteristics between an insurance policy and an annuity. There are two phases of an annuity contract: the accumulation phase, and the distribution phase.
An annuity contract is a long-term investment, and it commits your annuity funds to the contract during the accumulation phase. In some cases, those funds are not available for withdrawal. There is also some risk with variable annuities if the value of the underlying investments falls. Annuities can help provide assurance that you will have a steady income stream when you need it.
Multi-Year Guaranteed Annuities
MYGA’s are Multi-Year Guaranteed Annuities. They are tax-deferred, and are typically purchased with a single premium.
Growth is the focus of this annuity. MYGA’s earn a fixed rate over a multi-year time horizon. The interest rate will be specified upfront and will vary based on:
the amount you’re investing;
your investment horizon;
the insurance company’s credit rating; and
market conditions at the time of purchase
Single Premium Immediate Annuities
SPIA’s are Single Premium Immediate Annuities. These can provide an income stream immediately (within one year) after the contract is issued.
Monthly payments are determined by the amount of the premium that was paid, the age(s) of the annuitant(s), current interest rates and the income period that was selected in the contract (the rest of your life or a specified period of time).
Deferred Income Annuities
DIA’s are deferred income annuities, also known as longevity annuities. The income stream is delayed for a certain period of time (more than a year) as specified in the contract.
Monthly payments are determined by the amount of the premium that was paid, the age of the contract owner, the length of deferral after the premium deposit and the date and timeframe in which the income stream will be realized.
Fixed Indexed Annuities
FIA’s are fixed indexed annuities. These are essentially fixed annuities with a variable rate of interest that is added to your contract value if any underlying market index (e.g. S&P 500) is positive.
Growth is subject to market fluctuation and, when quoted, is often accompanied by a rate ceiling and rate floor. The floor is the lowest rate of return you will receive on your initial investment, regardless of market conditions. The ceiling (a.k.a. cap), is the largest rate of return you can expect to receive if the benchmark index experiences a sharp increase. Cap rates are often re-set by the insurance company each year.