Variable and Immediate Annuities

Although annuity contracts have different variations and features, there are basically two types of annuity: immediate annuity and deferred annuity. Immediate annuity is a part of an insurance policy wherein the client pays an insurance company a sum of money in exchange of future income stream. The income stream may either be fixed or increasing, depending on the rules and conditions of the contract. The income payment is good for a number of years, usually beginning from a client's retirement, or for a lifetime.

While the main purpose of immediate annuity is financial security during a client's retirement, and perhaps until death, deferred annuity is mainly a financial strategy to earn money through gaining from interest rates. The client deposits money into her account and then withdraws it in lump-sum once the payout period can already begin.

Instead of creating a mutual fund or opening a time deposit account, investing through deferred annuity is a better option since any increase in account values is not taxed, growing the client's investment returns as she postpones the payment of her income taxes. There are two kinds of deferred annuity. Annuity contracts that increase its value through an agreed interest rate are called fixed deferred annuities. Annuity contracts that allow the money to be transformed into stock or bond funds are called variable annuities. Unlike fixed deferred annuities, variable annuities are not secured to continuously increase in value, since it is in the client's prerogative as to where she wants to allocate her investments.