The four types of annuities

Published 4:02 pm Friday, September 4, 2009

Annuities are becoming increasingly popular as more people seek ways to ensure they won’t outlive their assets.

To help you brush up on the basics of these complex investment alternatives, the following is a general overview of the four basic types of annuities:

Fixed annuities—Fixed annuities provide both a guarantee of principal and a guaranteed interest rate—currently about 4.5 percent. Guarantees are made by the insurance company that issues the policy; however, they are only as strong as that underlying company.

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Indexed annuities—These are actually hybrid fixed annuities. The insurance company guarantees to return your principal after a given time frame (usually five to 10 years), but you give up your guaranteed interest in exchange for the opportunity to earn additional interest if a specified stock market index rises. The attraction to this type of annuity is that there is a “floor” under it; the value doesn’t fall if the market declines.

Variable annuities—Unlike fixed annuities, variable annuities do not guarantee a specific rate of return. Rather, your return is based on investment performance. The death benefits attached to variable annuities usually mean your beneficiary will receive the total invested (at least), even if the account has lost money. An added fee can buy a “step-up” that will add a specified rate of return on your total investment.

Variable annuities are long-term investment alternatives designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax, and if made prior to age 59 1/2, may be subject to a 10 percent federal tax penalty. Early withdrawals may be subject to withdrawal charges. Partial withdrawals may also reduce benefits available under the contract as well as the amount available upon a full surrender. An investment in variable annuities involves risk, including possible loss of principal. The contracts, when redeemed, may be worth more or less than the original investment. Guarantees are based on the claims-paying ability of the issuing company. Death benefits attached to variable annuities sometimes expire at a stipulated age. Every contract will carry fees and charges such as mortality and expense charges, early withdrawal charges and a contract administration fee.

Immediate annuities—While fixed, indexed and variable annuities all allow you to accumulate assets for a future income stream, immediate annuities provide income today, and for any period you choose—even the span of your life. One common selection is an income stream that lasts for the longer of your lifetime or 20 years, otherwise known as “life or period certain” (if the holder dies before the guaranteed period, designated beneficiaries receive payments until the time limit is reached). Immediate annuities can be either fixed or variable.

Annuities can add valuable stability to your retirement plan, but they do carry certain risks that make them not right for everyone. That’s why professional guidance is crucial. I’ll be glad to help you learn more about these unique retirement vehicles and how they may fit into your overall plan.

Investors should carefully consider the investment objectives, risks, charges and expenses of variable annuities before investing. The prospectus contains this and other information about variable annuities. The prospectus for both the variable annuity contract and the underlying funds is available from your financial adviser and should be read carefully before investing.

Stephen P. Poitevint is a registered principal and financial adviser with the firm of Raymond James Financial Services Inc., member FINRA/SIPC, and is located at 908 Tallahassee Hwy., Bainbridge, Ga., and can be contacted at (229) 246-7208 or