Posted on January 10, 2019 By Judy Tan Editor's Pick, Finances

You’ve probably heard about annuities, maybe even from one of our articles. However, like most other people, you probably don’t really know what an annuity is, or how it works.

Annuities are not mainstream products, probably because annuity companies generally outsource sales to people who don’t always have the best intentions. This problem has given annuities a bad reputation, but they might not deserve it.

At their simplest, annuities are a guarantee that if you turn over money you’ll get that same amount, and most often more, back. This pay and return can happen all at once or over time. Sort of like insurance is in place in case of a medical or natural disaster, annuities are in place in case of financial disaster. For example, if you live longer than you planned and might run out of retirement money, an annuity can help. Or, if your investments do terribly one year, your annuity can offer some financial relief.

Unfortunately, annuities have become a lot more complex than that simple explanation. You may feel lost of overwhelmed when faced with choosing an annuity plan. To help, we’ve broken down annuities into 4 main types with their own unique benefits:

• Paycheck – Paycheck annuities are somewhat similar to pensions in that you hand over some money and then receive a regular check for the rest of your life. You can choose an immediate income annuity that will start sending you checks right away, or a deferred income annuity (or longevity insurance) in which checks start coming later. The longer you wait to get your annuity checks, the bigger they will be. There are some risks involved in a deferred income annuity, however. If you wait too long you might die before collecting all your money.
• Fixed – Fixed annuities start the same in that you hand over money, the money grows at a fixed rate, and then you get a regular check for life after a period of time. However, with fixed annuities the amount the company adds to your account may change from year to year based on interest rates.
• Variable – This kind of annuity lets you have your money without a lot of risk. Fixed and paycheck annuities don’t allow owners access to the stock market, but variable annuities have sub-accounts that can be invested in the market at the owner’s discretion. This investment flexibility can allow for higher growth over the baseline minimum, but it does come with high fees.
• Equity Indexed – With this kind of annuity, you still get a guarantee that you’ll get your money back, and you’ll also get a credit if the equity index goes up. Your gain is usually only a percentage of the actual gain, and the overall amount you get in any given year is generally subject to a cap and additional fees.

Annuities don’t have to be confusing or stressful, but any annuity decision you make should carry some weight.

If you want to learn more about annuities in detail, you can check out these resources:

What do you think about annuities? Comment below. Be on the look out for more articles and tips.