Immediate annuities are types of annuities that provide income to the holder(s)—in the form of disbursements called distributions—soon after payment is received by the insurance company. The payment is made in a single lump sum.
A typical buyer of an immediate annuity is a retiree who uses his or her accumulated savings to purchase an annuity to provide a supplemental income stream.
Lifetime annuities are a type of annuity in which distribution payments to the holder(s) continue for the duration of his or her lifetime. The lifetime annuity is purchased with one lump sum payment. In the purest form, any further value remaining in the contract at the holder's death reverts to the insurance company.
Deferred annuities are types of annuities that are purchased with regular, periodic payments lasting for years. The payments are compiled and invested by the insurance company; this interval of payment and investment is called the accumulation period. Distributions begin only at the conclusion of the accumulation period. Unlike immediate annuities, deferred annuities allow the holder(s) to save for retirement rather than being forced to purchase the annuity at once.
A fixed deferred annuity is a type of annuity that pays a fixed, guaranteed rate of interest for an initial part of the accumulation period. Subsequently, the fixed rate may change in accordance with market conditions. There will be a minimum guaranteed rate. A death benefit feature is available.
A fixed annuity is commonly purchased at or near retirement and is comparable to a high-grade fixed-income security in its risk/return characteristics.
Indexed annuities are a type of annuity whose credited interest rate is tied to an index of economic performance, usually an equity index like the Standard & Poor's 500. Indexing allows the annuity holder to participate in market gains while limiting fluctuations in value to changes in a broad index. Indexed annuities contain minimum guarantees for credited interest and income. They limit the degree to which changes in the index cause changes in the credited interest rate and also specify the time periods used to calculate index changes.
Indexed annuities are a hybrid of fixed and variable annuities, but closer to the former in the risk/return spectrum. Although most indexed annuities are not securities today, they will be classified as such beginning in January, 2011.
Multi-Year Guarantees Annuities (AKA CD Look-a-like Annuities)
CD annuities are a type of fixed annuity in which the length of the interest-rate guarantee matches the term of the contract and duration of surrender charges. The name derives from a superficial similarity to bank CDs—both exhibit fixed interest paid for the contract term and limited liquidity resulting from penalties for early withdrawal.
Despite their name, CD annuities are medium to long-term investment vehicles suitable for retirement savings. As a fixed annuity, their risk/return profile is conservative and fixed-income in nature.