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What are the types of annuities and how do they work?

Annuities are insurance contracts that can provide a stream of income. There are many different varieties. Here’s what you need to know.

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You may be intimidated when you hear the word “annuity.”

Yes, these financial products can be complicated, but they’re also one of the few sources of retirement income that can be guaranteed for life. (Guarantees are based on the claims paying ability of the issuing company.)

An annuity is a contract issued by an insurance company. You make a lump-sum payment or a series of payments to buy an annuity. In return, the company issuing the annuity converts your payment or payments into a stream of income for you.

Some offer death benefit protection as well, but this can vary by the type of annuity purchased, or in certain types of annuities, it can vary depending upon the annuity option that is chosen within that annuity.

“They are designed for people who are nearing or entering retirement to provide a layer of security and protection,” says Todd Giesing, director of annuity research at LIMRA Secure Retirement Institute.

Annuities come in several types. So it’s important to understand what you’re buying and whether a particular annuity is the right for you.

The types of annuities

Here are the basic types of annuities most common in the market and how they work:

In this article:

Deferred annuities

Deferred annuities are designed for long-term goals like retirement. They come in three main varieties:

Deferred fixed annuity

A deferred fixed annuity offers a guaranteed interest rate, tax-deferred* growth and principal protection. It earns interest at a rate that is set by the insurer, and the rate can change over the course of the contract. There is often a guaranteed minimum interest rate. Deferred fixed annuities are designed for conservative growth.

Deferred variable annuity

A deferred variable annuity offers tax-deferred growth potential, a range of investment choices, and the potential for loss in value. Keep in mind that purchasing a variable annuity involves risk. The value of your contract can go up or down, depending on the performance of the underlying investments.

Deferred fixed index annuity

A deferred fixed index annuity credits interest to an index account based in part on the performance of an index, such as the S&P 500 stock index**. These annuities offer tax-deferred growth and market loss protection. They can provide you with the potential for a higher interest rate than with a deferred fixed annuity, but it is also possible that there could be a year where you would receive zero interest. Interest is typically credited only once a year.

Income annuities

Income annuities provide guaranteed income from the day your premium is paid. They come in two main varieties:

Immediate income annuity

An immediate income annuity offers guaranteed income that begins within 12 months of contract issue. These annuities offer limited liquidity and are intended for immediate income needs. They may appeal to a person near retirement with a lump sum of money and rather than spend it all at once, you can purchase an income annuity to spread that money out into payments over time.

It’s important to note that once you pay into annuity, you can only access that money as it is paid to you from the annuity as income.

Deferred income annuity

A deferred income annuity offers flexible purchase payments, guaranteed income that usually begins no earlier than 13 months after contract issue, and in most instances offers no liquidity (you can’t access the money you use to buy the annuity, but will receive it as income payments from the annuity). It is intended for future income needs. Usually, the longer you wait to get a payout, the bigger it will be, Giesing says.

Innovations in deferred income annuities are giving people with aging parents peace of mind. AgeUp, a new kind of annuity product created by a team within Haven Life and issued by our parent company MassMutual, is designed to help protect families from the financial risk of loved ones living into their 90s and beyond.

How to know if an annuity is right for you

Annuities can be a valuable tool for people who are near or in retirement and want a guaranteed source of retirement income. But that doesn’t mean they are ideal for all retirees.

You’ll also want to consider the various fees and charges that apply to annuities.

This is a high level overview of common types of annuities. Because they can be complicated, it’s best to work with a financial professional to find out more and to see if they align with your retirement savings plan, Giesing says.

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About Cameron Huddleston

Cameron Huddleston is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. She is an award-winning journalist with more than 18 years of experience writing about personal finance. Her work has appeared in Kiplinger’s Personal Finance, Business Insider, Chicago Tribune, Forbes, MSN, Yahoo and many more print and online publications. U.S. News & World Report named Cameron one of the top personal finance experts to follow on Twitter, and AOL Daily Finance named me one of the top 20 personal finance influencers to follow on Twitter. She has appeared on CNBC, MSNBC, CNN and “Fox & Friends” and has been a guest on ABC News Radio, Wall Street Journal Radio, NPR and more than 30 podcasts. Cameron has also been interviewed and quoted as an expert in The New York Times, Chicago Tribune,, MarketWatch and more.

Read more by Cameron Huddleston

Our editorial policy

Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our editorial policy

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

Our disclosures

Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.

MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.

Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit:

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