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An annuity is a retirement planning tool designed to protect against the risk of outliving one's financial resources. Annuities are one of the few investment vehicles that allow your money to grow tax deferred.

Prior to discussing the different kinds of annuities available today, it is important to understand the basic mechanics of how an annuity works. An annuity has two distinct parts called the Accumulation Period and the Annuitization Period.

• The Accumulation Period is the period of time where the policyholder invests money into the annuity policy. This period can last one day (as in an immediate annuity) or can last up to several decades. The objective of the accumulation period is to accumulate a pool of money from which the policyholder will later draw regular payments. Simply put, the accumulation period is when the policyholder puts money into the annuity.
  
• The Annuitization Period always follows the accumulation period. This is when the policyholder takes distributions or payments from the annuity policy. These payments are commonly used to replace an individual's income after his/her retirement. The annuitization period, therefore, is when the policyholder takes money out of the annuity.

Once a policy is annuitized (the moment where the annuitization period begins), the policyholder usually has a choice of how he/she wishes to receive the policy distributions. All policy guarantees are subject to the claims-paying ability of the insurer. Below are the three most popular annuitization payout options:

• Straight Life: provides income until the annuitant dies. This generally provides the greatest annuity payment, but has the highest level of risk. Once the policy is annuitized and the annuitant dies, annuity payments will stop.
  
• Life with Period Certain: provides income until the annuitant dies. If the annuitant dies before the designated certain period, the insurer will pay the balance to contingent beneficiary pre-selected by the policyholder for the remainder of the certain period. This option's annuity payment is generally less than that of Straight Life, but provides that annuity payments will continue for a fixed period of time regardless of whether or not the annuitant dies.
  
• Joint and Survivor:provides income to two or more individuals until all of the individuals die. The annuity payment for the Joint and Survivor option is generally the smallest of the three options listed here, but provides income for the lives of two or more individuals.

There are three basic types of policies in which most annuities can be categorized: fixed, variable, and equity indexed annuities. These categories specify how the funds in each policy are invested.

In a Fixed Annuity, the policy cash value earns a pre-determined and fixed rate of return throughout the accumulation period. The policyholder is then guaranteed a fixed dollar pay-out when he/she annuitizes the policy and begins to receive the annuity income.

Like variable life insurance, the funds invested in a Variable Annuity are invested in portfolios of securities in an account separate from the general assets of the insurance company. During the accumulation period, the growth of those funds is directly related to performance of the underlying securities. Likewise, during the annuitization period, the value of each annuity payment will also fluctuate based on the performance of the underlying securities.

A variable annuity offers more growth potential and investment choices than a fixed annuity, but also carries more risk. Variable annuity policies provide the upside opportunity for the investor to grow the cash value of the policy by investing in securities. With this, however, comes the risk of negative portfolio or market performance and the possibility of losing the money in those investments. The insurance company does not guarantee investment returns and the cash value will fluctuate depending on the performance of the underlying portfolio investments.

An Equity Indexed Annuity (or “Indexed Annuity”) is a product that's performance is directly tied to a major stock market index (such as the S&P 500). It is a cross between a fixed and variable annuity in that a equity indexed annuity offers the risk-stabilizing features of a fixed policy, yet has the upside market potential of a variable product. An Equity Indexed Annuity should be considered as a long-term investment. In addition, the policyholder carries the risks of required waiting periods and limits on participations in market returns.

With all of the variables and choices available today, We recommends that you contact an associate to discuss if an annuity strategy is right for you. To schedule an appointment with an Associate professional, please click here.