Different Types of Annuities and Where to Buy Them

Annuities can be incredibly confusing, but they don’t have to be. Once you understand the most common annuity acronyms, it’s a lot less scary. Each annuity contract will be unique to your needs, the insurance company, and the optional riders available.

When buying an annuity, it’s best to zoom out and look at your entire financial picture first, and then decide if an annuity is right for you. We don’t want you to get excited about one particular type of annuity first, and then figure out how to make it fit your goals. Your life and retirement goals should drive all your retirement decisions.

Why Annuities Come Up in Retirement Planning

An annuity is a contract with an insurance company to provide you with a steady stream of income. Many annuities offer lifetime income, but it often comes at a significant cost in fees and commissions.

Due to the attractive commissions, annuities often tend to be oversold to consumers. It’s essential to do your research and make sure an annuity actually makes sense in your retirement plan.

Benefits of Annuities

There are benefits to annuities. If you’re concerned about running out of money or getting overly stressed thinking about market swings, they could be a helpful tool. We wouldn’t suggest making an annuity your only source of income, but it can be a good complement to a diversified portfolio.

An annuity is a way to ensure against running out of money. There are some unique types of annuities that might make sense in certain situations.

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Common Annuity Types You Might See (And What They Really Mean)

We’ll try to explain the most common types of annuities you may see. We promise to keep the acronym overload to a minimum. Let’s break it down:

Single Premium Immediate Annuity

A Single Premium Immediate Annuity (SPIA) is one of the easiest types to understand. You pay a single lump sum premium up front, and income starts, well, immediately. These can come in handy when you have a large sum of cash and want to convert it to a stream of income now.

A SPIA can still come in a few different options. You’ll have one or more of the following options: lifetime income, joint income, or period certain. If an annuity is right for you, you’ll need to select which income option works best for you.

Deferred Income Annuity

A Deferred Income Annuity (DIA) starts sending you payments later. In most cases, your payout may be higher than a SPIA, but you also take the risk of passing away before your payment period begins. If so, your heirs wouldn’t receive anything. There are some riders you can purchase to modify the contact, but they come at a cost.

A DIA can continue to grow at a specified rate until you begin annuity payments. Knowing you’ll have a set payment coming to you in the future can be helpful for other retirement planning.

Multi-Year Guaranteed Annuity

A Multi-Year Guaranteed Annuity (MYGA) is a type of deferred annuity that accumulates interest at a fixed rate for a specified period. In other words, you can lock in a growth rate for several years, usually between three and ten. As with any annuity, each contract will have unique features and fees.

A MYGA can be an excellent option for converting a lump sum into a future stream of income, without worrying about market fluctuations or interest rate changes. They’re typically not going to have a high yield (think CD rates), but you might not need to get the absolute highest return.

Fixed Indexed Annuity

A Fixed Indexed Annuity (FIA) gives you the potential for growth tied to a market index. The key selling point of FIAs is their limit on market losses. The accumulation phase of the annuity is capped at a maximum rate as well.

In other words, your money in the contract grows at a “modified index” rate between zero and the maximum crediting. For example, if the index you choose returns 25% for the year, but the cap in the contract is 10%, then your account is only credited with 10%. The insurance company pockets the difference.

On the flip side, if the market has a negative return, then you won’t be credited with anything. You won’t lose any value, but it won’t gain either. In a down market year, the insurance company eats the difference.

Qualified Longevity Annuity Contract

A Qualified Longevity Annuity Contract (QLAC) is a specific type of annuity that acts like a backstop. In most cases, a QLAC only kicks in at your estimated life expectancy to ensure against outliving your money.

There were some improvements to QLACs in SECURE 2.0, so there may be more options for these in the future. Although QLACs are highly specialized, they can be a unique tool to reduce the risk of outliving your money.

Where Can You Buy an Annuity?

There are several ways you can purchase an annuity. Independent broker-dealers or independent insurance agents sell the majority of annuities. However, you can purchase an annuity through a “captive” agent who works directly for the insurance company selling the policy.

In other instances, you can buy an annuity through a bank or other financial institution. You may also be able to complete the process yourself online. However, we highly recommend taking the time to determine if an annuity is right for you first. It may not be necessary to accomplish your goals.

Buying An Annuity from a Broker or Independent Agent

These are generally very large companies offering a variety of investment and insurance products. The advantages of working with an independent broker or independent agent are that they often have several “lines of service” to choose from. This means they can help you compare annuities from several different companies.

However, brokers are held to a different regulatory standard than fee-only/based financial planners. Broker-dealers must meet a “suitability standard,” which means they are required to make sure whatever they sell you is generally appropriate, not necessarily the best option for you. A true fiduciary is legally required to put your best interests first.

Commissions Could Sway Choices

Another downfall of an independent agent or broker-dealer is that they may be influenced to recommend products based on the commissions they receive. Different insurance companies offer larger incentives for different products.

However, we feel the differences in commissions aren’t enough of a difference to make an agent entirely change their recommendation. Most of the time, they will look for the best product they have available.

Direct from Insurance Companies

The other option is to purchase an annuity directly from the issuing insurance company. You’ll often work with an agent at the company, known as a “captive” agent. However, many insurance companies offer some products for sale online.

The biggest downside to working with an insurance company directly is that they’ll only offer products they sell. In theory, the insurance company should be more knowledgeable about the specific products and features it sells. This isn’t always the case, and each insurance company provides different levels of training to its agents.

The bottom line is that an individual insurance company is not required to look outside the company for better annuity products for your situation. In fact, they have a strong incentive to fit your needs into one of their products. This isn’t ill will on their part, it’s just a case of mismatched goals and incentives.

The insurance agent doesn’t get paid by you; they get paid on commission for products their company sells.

Banks and Credit Unions

It’s common for banks or credit unions to partner with insurers to offer annuity products. In most cases, these are very limited product options. However, some large banks and credit unions can leverage their customer base to secure competitive rates for their customers.

Just like buying from an insurance company directly, there will be varying amounts of training and products available. There’s also no incentive to look outside their institution for better products.

Online Marketplaces

You can also find many different annuity comparison tools online. Most of these also offer the option to help you make purchases through them. These may be fast and convenient, but you get no personalized guidance.

You also need to watch for entering your personal information. Many online comparison tools will want to add you to their email, mailing, or call list (or all of them). These can often be a major spam trigger, so be aware of this tactic.

Fee-only Financial Advisors

You can’t purchase an annuity or any insurance product through a fee-only planner. However, you can get advice with your best interests at the forefront of the conversation (fiduciary).

Without knowing the context of your whole financial situation, it’s hard to say what annuity, if any, could be right for you. A fiduciary can help you develop a holistic view of your financial life. This is the best starting point for any financial decision.

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Ratings for Insurance Companies and What They Mean

One of the most significant risks of purchasing an annuity is the possibility of the insurance company going out of business. It might not be very common, but it certainly does happen. Because of this risk, there’s a rating system for insurance companies. There are several companies that rate insurance companies.

The higher the credit rating the insurance company has, the better. However, it’s best to compare based on the same credit rating agency. The ratings can be a little confusing when you’re trying to determine if an A+ is better than a rating of AAA or Aaa.

The most common credit rating agencies are AM Best, Standard and Poor’s, Fitch, and Moody’s.

Why the “Best” Annuity Depends on Your Retirement Plan

Sometimes the “best annuity” might be no annuity at all. There are many variables to consider before jumping into a financial product like an annuity. You’ll need to understand your income needs, other retirement income streams, and most importantly, your goals in life.

It is not good for you to pick the “best annuity” if you didn’t need one in the first place. On the other hand, it doesn’t make sense to wait to find out an annuity could be the right fit. The only way to know is to build a solid financial plan covering all aspects of your financial life.

The Value of Working with a Fee-Only, Fiduciary Advisor

It’s essential to have a trusted advisor who’s committed to what’s best for you, not which product they can sell to you. A fee-only, fiduciary advisor can evaluate whether you need an annuity and then refer you to purchase one if needed. You’ll be armed with very specific features and criteria.

Example Using Car Buying

Imagine walking onto a car lot to buy “the best car” they have. The dealership might have a wildly different idea of what “best” means. Sure, they’ll ask questions to help you pick, but they’re not going to know all the details and the big “why” behind your purchase.

In contrast, spending time with a trusted friend to discuss all the details can help you have a list of criteria ready to go. This changes the conversation dramatically. You’ll end up creating a more collaborative environment because you have a clear sense of the outcome you want.

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What’s Next? Get a No-Obligation Retirement Checkup

If you’re ready to retire, it might be a great time to start working with a financial planner. A common time to start nailing down the details is during the transition phase, which typically begins roughly five years before retirement.

At NextGen Wealth, we help retirees and pre-retirees like you explore options and build a retirement plan for your life. Contact us today to schedule your no-obligation Retirement Checkup. No pressure. Just smart, thoughtful advice.