Overview of Annuities

Annuities are financial products sold by insurance companies that are designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used for retirement purposes, helping individuals manage their income in their post-work years.

Fixed Annuities

Fixed annuities offer a guaranteed payout, which is determined at the inception of the contract. The insurer guarantees both the rate of return on the investments and the payout, which makes fixed annuities a safer investment if security is a primary concern. The fixed payouts can be monthly, quarterly, annually, or in a lump sum, depending on the terms of the annuity contract.

Variable Annuities

Variable annuities, on the other hand, provide a payout that varies depending on the performance of the investment options chosen by the annuitant. The annuitant can divide their money among various investments, typically mutual funds, which can range from conservative to aggressive portfolios. While variable annuities offer the potential for higher returns, they also come with higher risk and no guarantees on the rate of return or payout amounts.

The choice between a fixed or variable annuity depends largely on the individual’s risk tolerance, financial goals, and the need for predictable income. Variable annuities might be suitable for those who are seeking to maximize their returns and are less concerned about guaranteeing a specific payout amount. In contrast, fixed annuities are more suitable for individuals who prioritize security and predictable income.