by Mayan Gabriel

Created on: February 09, 2009   Last Updated: March 13, 2009

Annuities are widely misunderstood and have been since their inception. Annuities, like other investment vehicles, have a wide range of utility, ranging from providing income to guaranteeing growth.

Within the annuity industry, there are several categories regarding annuities: variable annuities (VA), single premium immediate annuities (SPIAs), and fixed annuities (FA). Of these categories, there are subcategories that provide an assortment of features the client can choose from relative to their own personal goals and objectives.

Of the three categories mentioned above, SPIAs are of course immediate annuities and Vas and FAs are deferred. The difference between immediate and deferred annuities is as follows:

Single premium immediate annuities (SPIAs) are contracts between the client and the insurance company that state the insurance company will systematically pay the client a certain amount of money starting immediately, for a predetermined amount of time in exchange for the client's initial deposit of $X. The deposit will also earn minimal interest over the duration of the contract period. It is not so often that SPIAs are using lifetime payouts because of the MAJOR caveat that accompanies the investment. Once the client gives the money to the insurance company, it is no longer the client's. Depending on the SPIA, if client passes away prior to the maturity date of the contract, they lose the remaining value of their policy to the insurance company.

SPIAs will begin paying the client 30 days after issue, thus called immediate. SPIAs have much better use in terms of strategic case design and financial planning, but were primarily developed for providing income.

Deferred annuities are annuity products that provide investors tax-deferred growth. Many of these deferred annuities also have income riders that will provide income at a time of the client's choosing, once they are older than age 59.5.

Fixed annuities are deferred annuities that provide guaranteed growth to investors while at the same time guaranteeing no losses. Fixed annuity products provide market like returns with zero risk. These annuities are able to provide investors these types of guarantees because they do limit the growth for the investor in exchange for zero risk. An example may function very much like the following: If the stock market returns 10% this year, an investor in a FA may only be credited 7-8% gain. Similarly, if the market returned -10% next year, the investor in a FA will be credited 0% return.

Variable annuities are deferred annuities but they function very much like a mutual fund in regards to risk exposure. They do guarantee principle over the period of the contract, but do not necessarily guarantee growth. Though tax deferred, they do have additional options available to investors, which will provide for income at some point in the future.

SPIAs provide income for investors immediately for a predetermined amount of time and are excellent tools used in many instance of case design.

FAs and Vas are annuities that are tax deferred and in many instances provide stock market like returns with zero or limited risk. They too have income options available to be utilized at the time of the client's choosing.

Regardless of which annuity an investor is in, the client will still receive the great benefits of tax deferred growth, minimum guarantees, an account that bypasses probate and is safe from creditors. With these reasons alone, it is easy to see why annuities are quickly becoming very popular investments.

Learn more about this author, Mayan Gabriel.
Click here to send this author comments or questions.