An annuity is a financial tool used by many investors to enhance their financial portfolio’s.   

Annuities can supplement the other investments within your portfolio.   Your portfolio may also consist of other investments such as stocks, bonds, mutual funds and life insurance.

Investors have different financial needs.  Sometimes an annuity can help an investor meet their financial need, sometimes not.   As an investor you need to determine if annuities are a good fit for your personal financial portfolio.

There are different types of annuities.  If annuities are the right fit for your portfolio, you need to determine which type of annuity works best.  

Let’s look at the different types of annuity contracts and the different types of annuity investments.

Determine If Annuities Are Right For You:

What is An Annuity?

• Long term investments.
• Designed to supplement retirement income.
• Designed to guarantee a stream of income for life when annuitized.
• The guaranteed income for life benefit is one of the reasons annuities have become a very popular investment.
• The investments within an annuity can be fixed or variable.
• The annuity contract can be deferred or immediate.

What Are Fixed Annuities?

• Fixed annuities have a minimal exposure to market risks.
• With a fixed annuity your principal and interest rates are guaranteed.
• If you withdraw before a specific date, specified within the annuity contract, there may be fees assessed.
• These fees will vary per annuity company and product.
• When buying a fixed annuity make sure it includes a cost of living adjustment (COLA).
• This feature will adjust or counter your payouts for inflation.

Variable Annuities.

• Variable annuities invest in “sub-accounts” which resemble mutual funds.
• Because of the “sub-accounts” variable annuities are exposed to market risks. 
• The market risk causes the principal and earnings to fluctuate with changing market conditions.
• When the market is up, the value of the variable annuity is up, similar to how a mutual fund would respond to the market.
• Variable annuities typically have a “return-of-premium” death benefit built into the contract.
• This feature pays your beneficiary at least the amount you originally invested if you should die before you start withdrawals.
• Before investing in a variable annuity be sure to read the prospectus.

Deferred Annuities.

• This type of annuity contract defers your withdrawals and earnings.
• Your earnings will grow tax deferred until you start withdrawals.
• At withdrawal, the earnings are taxed as ordinary income.

Immediate or income annuities.

• This type of annuity contract starts your annuity payouts right away or “immediately”.
• Once you put money into an immediate or income annuity you lose access to the principal.
• The annuity company is guaranteeing you a stream of lifetime income and they cannot do that if you have access to the principal.

 When annuities are properly used as a financial tool, they can add value by enhancing your portfolio.   Remember that one of the best features an annuity offers that other investments don’t is the guaranteed stream of lifetime income feature.

Before investing, do your research.  Make sure you understand the features and benefits of annuities before you invest.