An annuity is like a retirement savings account and functions like a bank account or a certificate of deposit. The money invested in an annuity, however, is not insured by the Federal Deposit Insurance Corporation (FDIC). But annuities are generally considered safe investments because annuities are financial contracts between investors and insurance companies, which are regulated by state insurance commissions. There are two types of payouts from annuities. The annuity could be an immediate annuity, which means payouts begin soon after the first payment into the annuity is made. The other type of payout is a deferred annuity.
Fixed Annuity
Fixed annuities have interest rates that have a guaranteed minimum. Payouts are fixed amounts. Along with types of annuities, the interest gained on a fixed annuity is not taxed until money is paid out. Because the gains are not taxed, the investment can compound faster and accumulate more quickly.
Variable Annuity
A variable deferred annuity gains interest at a variable interest rate. The interest rate is tied to an account such as a mutual fund. The interest from a variable annuity may also be based on investments such as stocks and bonds. Payout amounts are not guaranteed with variable annuities.
Equity-Based
One type of a deferred variable annuity is an equity-based annuity. For an equity-based annuity, the interest rate is tied to the value of a stock index, such as the S&P 500. These types of investment spread the risk over an entire market. While interest rates may not be as high as other investment options, the risk is lower because the investment is spread out over an entire index of stocks.
Annuitize
Deferred annuities, whether they're fixed or variable, may be annuitized at any time. When an annuity is annuitized, it means that the value of the annuity is converted into a monthly income. The annuity agreement can be structured in a way so that the payments continue for lifespan of the annuity holder.
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