Types of Annuities

Details of the Different Annuity Types

Immediate or Deferred

Immediate or Deferred

Immediate annuities begin providing periodic benefit payments immediately after they are purchased. They are particularly attractive to people who retire and wish to convert savings and/or investment accounts into a guaranteed stream of income payments. Deferred annuities provide an initial period of time (following the purchase date) to fund the contract before payouts begin. This is known as the “accumulation period.” Premiums paid and interest earned during the accumulation period are credited by the insurer to the policy’s accumulation fund, and a minimum guaranteed interest rate is usually provided by the insurer during this period. Under a deferred annuity, the annuitant simply defers the beginning of payouts (“annuitization”) until some future date.

Qualified or Non-Qualified

Qualified or Non-Qualified

Federal law determines whether an annuity is considered “qualified” or “non-qualified.” Premiums paid into a qualified annuity are tax deductible (paid with pre-tax dollars). Taxes on those premiums, and on growth accumulated within the annuity, are deferred until funds are withdrawn. Premiums paid into a non-qualified annuity are not tax deductible. Taxes are deferred only on growth accumulated within the annuity.

Single Premium or Installment Premium

Single Premium or Installment Premium

Annuity contracts may be either single premium or installment premium. Single premium contracts require you to fully fund the annuity contract in one single premium payment. Installment premium contracts allow an annuity to be funded by means of premium payments over a period of time. Most often, installment premium annuities are also flexible premium contracts that allow you to pay as much as you desire whenever you choose, within specified limits.
 

Fixed or Variable

Fixed or Variable

A fixed annuity provides fixed-dollar income payments backed by the guarantees in the contract. For example, the company may guarantee that the interest rate on the funds accumulating in the policy will be at least three percent. Guarantees are based on conservative assumptions so that the company will be able to fulfill its promises and obligations regardless of economic conditions. In many instances, actual interest crediting rates may be greater than minimum guarantees; however, if you are shown any illustrations of how an annuity might grow in the future, you should keep in mind that the actual results may turn out to be better or worse than those shown in the illustrations. An annuity is classified as a variable if its value (during either the accumulation period or the payout period) is based directly on the performance of securities. In a variable annuity, funds are invested in securities such as stocks and unsecured bonds, which tend to fluctuate with economic conditions.

As a result, the value of a variable annuity depends upon the value of those underlying securities. You, the owner or “annuitant,” bear the investment risk as the value of the annuity rises and falls with the investment performance of the underlying securities. Within a variable annuity, invested funds are held in the annuity’s “separate account.” If you are thinking about buying a variable annuity, you should be especially careful in making sure that it suits your needs and risk tolerance.

The North Carolina Department of Insurance and the U.S. Securities and Exchange Commission regulate companies authorized to sell variable annuities in North Carolina. Licensed life insurance agents, banks and brokerage houses that sell variable annuities must also hold a securities license.

Equity – Indexed Annuities

Equity – Indexed Annuities

The accumulation value of the annuity is based upon the increase or decrease of a specified index (such as a stock index). The calculations used to determine this value may differ for each product. The policy will usually specify a guaranteed minimum interest rate for fund accumulation.