There are several types of annuities, and choosing the right one depends on your goals, risk tolerance, and timeline. This guide breaks down each type in plain English so you can make an informed decision.
The Two Main Categories
Before diving into specific types, understand that annuities are classified in two ways:
- By how you fund them: Single premium (one lump sum) vs. flexible premium (multiple payments over time)
- By when income starts: Immediate (income starts now) vs. deferred (income starts later)
Within those categories, the type of annuity determines how your money grows and how your payments are calculated.
Fixed Annuities
A fixed annuity pays a guaranteed interest rate for a set period — typically 3 to 10 years. Think of it as a CD (certificate of deposit) issued by an insurance company instead of a bank.
How it works: You deposit a lump sum. The insurance company guarantees a fixed interest rate (e.g., 4.5%) for a specified term. Your money grows tax-deferred.
Best for: Conservative savers who want guaranteed returns without market risk. People who want a safe place to park money before converting to income later.
Example: You deposit $100,000 into a 5-year fixed annuity at 4.5%. After 5 years, your account has grown to approximately $124,618 — all tax-deferred.
Variable Annuities
A variable annuity invests your money in subaccounts — essentially mutual funds within the annuity. Your returns depend on market performance.
How it works: You choose from a menu of investment subaccounts (stocks, bonds, money market). Your account value fluctuates with the market. Many variable annuities offer optional riders (at additional cost) that guarantee a minimum income regardless of market performance.
Best for: People who want growth potential and are comfortable with market risk. Those with a longer time horizon (10+ years to retirement).
Important note: Variable annuities typically have higher fees than other types — annual fees of 2-3% are common. Always ask about total costs before purchasing.
Fixed Indexed Annuities (FIAs)
A fixed indexed annuity is a hybrid. Your returns are linked to a market index (like the S&P 500), but with a guaranteed minimum — so you get some upside with downside protection.
How it works: The carrier credits interest based on the performance of a market index, subject to a cap (e.g., 8%) and a floor (typically 0%). If the index goes up 12%, you might earn 8% (the cap). If it drops 20%, you earn 0% — but you never lose principal.
Best for: People who want more growth potential than a fixed annuity but less risk than a variable annuity. A popular choice for people 5-10 years from retirement.
Immediate Annuities (SPIA)
A single premium immediate annuity (SPIA) converts a lump sum into income that starts right away — usually within 30 days of purchase. This is the most straightforward type of life annuity.
How it works: You give the insurance company a lump sum. They calculate your monthly payment based on your age, gender, and current rates. Payments begin immediately and continue for life.
Best for: Retirees who want income now. People who have just retired, received an inheritance, or sold a property and want to convert cash into guaranteed lifetime income.
Example: A 65-year-old man who purchases a $100,000 SPIA could receive approximately $632/month for life. A 65-year-old woman would receive about $598/month (lower because women live longer on average). See current rates.
Deferred Income Annuities (DIA)
A deferred income annuity works like a SPIA, but income doesn't start until a future date you choose — typically 2 to 40 years later.
How it works: You pay now, but income starts at a future date (e.g., at age 70 or 75). Because the carrier holds your money longer, your eventual monthly payment is significantly higher than an immediate annuity.
Best for: People in their 50s or early 60s who are planning ahead. Those who want to guarantee income starting at a specific future age.
Qualified Longevity Annuity Contract (QLAC)
A QLAC is a specific type of deferred annuity purchased within a qualified retirement account (IRA, 401(k)). It has a unique tax advantage: money in a QLAC is excluded from required minimum distribution (RMD) calculations.
How it works: You can move up to $200,000 from your IRA into a QLAC. Income starts at a future date (up to age 85). The amount in the QLAC is not counted when calculating your RMDs, reducing your tax burden until payments begin.
Best for: People who don't need all of their IRA money right away and want to reduce RMDs while securing guaranteed future income.
Comparison Table
| Type | Risk Level | Growth Potential | Income Start | Typical Fees |
|---|---|---|---|---|
| Fixed | Very low | Guaranteed rate | Flexible | Low / none |
| Variable | Moderate-high | Market-linked | Flexible | High (2-3%) |
| Fixed Indexed | Low-moderate | Index-linked (capped) | Flexible | Moderate |
| Immediate (SPIA) | Very low | N/A (income product) | Immediately | Low / none |
| Deferred Income | Very low | N/A (income product) | Future date | Low / none |
| QLAC | Very low | N/A (income product) | Up to age 85 | Low / none |
Which Type Is Right for You?
Here's a quick guide based on common situations:
- You're retired and want income now: Look at an immediate annuity (SPIA). It's the simplest, lowest-fee option for converting savings into guaranteed lifetime income.
- You're 5-10 years from retirement: A fixed indexed annuity gives you growth potential with downside protection during your final working years.
- You want maximum safety: A fixed annuity offers guaranteed rates with zero market risk — like a CD, but with tax-deferred growth.
- You want growth and can tolerate risk: A variable annuity offers market-linked returns, but make sure you understand the fees.
- You want to reduce your RMDs: A QLAC lets you shelter up to $200,000 from required minimum distributions.
- You're helping a parent plan retirement: Start with a SPIA or fixed annuity — they're the easiest to understand and have the lowest fees.
Not sure which is right? Try our calculator to see what income you could expect, or request a free quote and our specialists will walk you through your options.