I think it might be nearly impossible for consumers to keep track of the nuances of all of the different types of annuities.
One of the easiest ways to distinguish them is to divide them into two categories:
Annuities for accumulation only and annuities for guaranteed income benefits.
Annuities can be used to accumulate money. The annuity wrapper protects all gains from being taxed. There are various investment options depending on the type of annuity. Variable annuities use mutual fund like options called subaccounts. Fixed annuities and indexed annuities use non-stock market sensitive options that are tied to the growth of the market, but do not participate in 100% of it. Both fixed and indexed annuities are protected from losses.
Annuities can also be used to create a guaranteed income either now or in the future. Annuities that create an immediate guaranteed income are called Single Premium Immediate Annuities. Annuities that create guaranteed income in the future are either Deferred Income Annuities or Indexed Annuities with an income rider.
Knowing what you want from an annuity is critical to determining which options to choose. Know whether or not you are using the tool to accumulate money or for guaranteed income.
If you’re using the annuity for accumulation only, next determine whether or not you’re comfortable with stock market losses. If so, variable annuities are suitable. If not, fixed or indexed annuities are most suitable.
If you are using an annuity for guaranteed income in the future, ensure that the future guarantees match your income needs and that the fees charged for the account or fully disclosed to your comfortable with them.
