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Types of Annuities

Understanding annuities is a difficult task for most everyday people because of the seemingly endless options and intimidating jargon associated with each type. In reality, there are only a few distinct types of different annuities and this page will help make it easier for you to understand them. There are three main categories to consider: payout time, type of investment, and options for liquidity.

Payout Time: Immediate or Deferred Annuities

Immediate Annuity

As the name suggests, this type of annuity provides payments to the individual immediately upon investment. This agreement is aimed for those who require immediate income from their annuity investment. There are several types of payment options you can choose from within this framework. For example, you can choose "period payments" typically between five to twenty years, you can choose lifelong payments for you or your spouse, or a combined payment schedule of these two options. Another option is to select a fixed payment that remains constant, or a variable payment that changes based on the market performance of your investment.

Deferred Annuity

In this type of annuity, the investor will plan to receive their payments at some agreed upon future date, most commonly the date of your retirement. However, many types of deferred payment agreements still allow for some type of withdrawal payments as soon as thirty days after your purchase, often up to 10% per year. In this annuity, investors can pay a one-time lump sum or continue to make periodic payments at a either a variable or fixed rate. These funds remain untaxed until the investor is ready to receive their payments, at which time the income is taxed. A deferred annuity is the most commonly recommended form for most investors and makes up the vast majority of United States annuity sales.

Type of Investment: Fixed or Variable Annuities

Fixed Annuities

The majority of fixed annuity agreements are invested in corporate and government bonds. In most cases, these types offer a rate of return that is guaranteed over a specified period (usually one to fifteen years). Within this category, there are two general types of fixed annuity agreements. First, the GRA (Guaranteed Return Annuities) which makes the promise that you will not receive less than 100% of your investment. Should you end your investment, no market fluctuations will impact your principal investment. Second is the MVA (Market Value Adjustment) which works similarly, but does not offer the same guarantee if the market fluctuates and you choose to end your agreement. MVAs typically offer a larger payout than the GRA due to increased risk, but it's important to take into account the risk and financial strength of the issuing company before you make a final purchase.

Variable Annuities

By opting for a variable annuity, you are investing in a variety of sub accounts which are reflective of actual market performance. Among these investors can choose from different types, from conservative (money market, government bonds) to more aggressive and higher risk accounts (capital appreciation, aggressive growth). There are usually minimum guarantees for returns, withdrawals, and payments. Investors in this type of annuity typically have a higher tolerance for risk in their finance and want to exhibit a wide portfolio range.

Options for Liquidity:
Annuities with or without Withdrawal Penalties

Some annuities do allow you to take out some of your investment interest earnings without a penalty charge, but most do have some kind of associated surrender charge, especially for withdrawals over 15%. The majority of companies do have some kind of arrangement for annuities with no withdrawal penalties, although many brokers aren't keen to recommend these types. Depending on your situation, you may actually benefit more from an annuity with penalties because of the associated bonuses as well. Talk with your financial advisor to decide which type is right for you and your financial standing.

Disclaimer: C.W. Gibson Financial is listed with the State of Idaho as a Registered Investment Advisor. This firm does not accept or solicit business in any state which it is not registered or otherwise qualified to conduct business by virtue of a state "de minimus" exemptio. We will never collect financial information from clients online. Any personal or financial information required will be collected in person at the firm's local office. While our firm may promote certain government services, we are not an agent of the state or federal government.

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