Income annuities allow individuals to generate income to last the rest of their lives. An annuity is an investment of a lump sum of cash that produces a monthly stream of income over time. This financial product is sold by insurance companies or other financial institutions, allowing investors to receive payments while still saving for retirement and leaving funds for charity or family members after death. Payments can be scheduled monthly, quarterly, annually, and in lump sums. The size of the payments are determined by a variety of factors, including the type of annuity, the length of the payment period, and whether the annuity is immediate or deferred. With the immediate annuity, investors receive payments soon after the initial investment. With a deferred annuity, investors defer payments and taxes to a later time, simply accumulating money in the account. There are three main types of annuities: fixed, variable, and indexed. Read on to discover more about choosing income annuities.

Fixed annuities are generally offered by insurance companies. These types of annuities guarantee that investors make a standard and fixed interest rate on there investment. This is a no-risk investment, as the insurance company assumes all risk. Plus, this type of annuity is not tied to the stock market. In general, investors can withdraw up to 10% per year from a fixed annuity with no penalties. Many companies also offer a 30-day period during which investors can remove their money if they aren’t happy with the fixed annuity.

A variable annuity is also generally offered by insurance companies. They are similar to fixed annuities except they combine the elements of life insurance, mutual funds, and tax deferred retirement savings plans. When investing in a variable annuity, investors can select a variety of mutual funds to invest in. There are two phases to variable annuities: accumulation and payout. During the accumulation phase, investors pay money into the account and choose from a variety of invest options for those funds to diversify their investments. Payments occur during the payout phase for a lifetime or a specified number of years. One of the advantages of a variable annuity is the death benefit for beneficiaries.

Indexed annuities are similar to fixed and variable annuities. However, money invested makes returns based on the changes of a stock market index, such as the S&P 500. Regardless of the stock market, insurance companies guarantee minimum returns on indexed annuity investments. Investors can take out up to 10% a year with no penalty, and they can also add a death benefit for a named beneficiary.

It is essential for investors to consider the purpose of an annuity before making a financial commitment. Those nearing retirement may want to invest in a fixed annuity, while those leaving their money for family members may want to choose variable or indexed annuities. Those investing in annuities should keep a two to five year window open during which they won’t need the funds they are investing. This keeps any fees or penalties at a minimum.