Annuities in plain English
An annuity is a contract with an insurance company. You give it money, and in return it promises growth, income, or both. The details are where the different types, and most of the confusion, come in.
Multi-year guaranteed annuity (MYGA)
What it does: pays a fixed interest rate for a set term, usually 2 to 10 years. Think of it as the insurance-company version of a CD, with tax-deferred growth.
Who it fits: people who want a guaranteed rate on money they won't need for the term.
Watch for: surrender charges if you take out more than the free amount before the term ends.
Fixed indexed annuity (FIA)
What it does: credits interest based on part of a market index's gain, such as the S&P 500, with no loss when the index goes down. Growth is limited by caps or participation rates.
Who it fits: people who want more growth potential than a fixed rate without market risk to their principal.
Watch for: longer surrender periods (often 7 to 10 years), caps the company can change each year, and the difference between the account value and any bonus or income base.
Income riders
What they do: add-ons, usually on an FIA, that guarantee lifetime withdrawals based on an "income base." The income base is a calculation for income only; it is not money you can withdraw as a lump sum.
Who they fit: people who want the option to turn on lifetime income later while keeping access to their account.
Watch for: annual fees, usually around 1% a year, and how long the income base keeps growing. Read the rider terms closely.
Single premium immediate annuity (SPIA)
What it does: turns a lump sum into guaranteed payments that start within a year, for life or for a set period.
Who it fits: people who want the highest guaranteed income per dollar, starting now.
Watch for: once payments start, the money is generally no longer accessible as a lump sum. Options like cash refund or period certain protect your heirs, at a cost to the payment amount.
Deferred income annuity (DIA)
What it does: you pay today, and guaranteed income starts at a future date you choose, often 5 to 15 years out. The longer you wait, the larger the payment.
Who it fits: people planning ahead for income at a specific age.
Variable annuities
Variable annuities invest in market subaccounts and can lose value. They have different fees and rules, and they're a different conversation. Most people who come to me want protection from market losses, so I focus on fixed, indexed and income annuities.
The question that matters most isn't which annuity is best. It's what you need the money to do. Once that's clear, the right type, or the decision not to use one, usually follows.
Have a question about your money?
Bring me the numbers: a CD that's coming due, a 401(k) you're about to roll over, or an illustration someone sent you. I'll give you a straight read on it. The call is free and commits you to nothing.