From Bogleheads

Types of Annuities

  • Deferred annuities are used to accumulate assets. Funds will grow at a rate that can be either fixed or variable.
  • Fixed annuity: The money you put in a fixed annuity earns interest at a rate that is guaranteed for a specific period of time—ranging from one to five years or more, depending on the terms of the contract. When that period ends, a new rate may take effect—or the old rate may be offered again.
  • Variable annuity: With a variable annuity, your money is put in subaccount investments that are similar to stock and bond funds. The return on your investments is subject to the risk of market fluctuation. Your total account value depends on how much risk you take, the performance of the subaccounts, and what charges and fees are deducted.
  • Equity-indexed annuity also referred to as a fixed indexed annuity, is a type of fixed annuity where earnings accumulate at a rate based on a formula linked in part to a published equity-based index, such as the Standard & Poor’s 500 Composite Stock Price IndexTM (S&P 500). An indexed annuity provides a guarantee of a minimum accumulation value, and may also offer death benefit protection and a variety of payout options. The index used, the formula that determines the indexed rate and the guaranteed minimum value, can vary from insurer to insurer.
  • Immediate (Income) annuities are used to convert a lump sum into an income stream (regular payments), typically for the life of the annuitant. If the income stream is fixed, it is considered a fixed immediate annuity; also known as a Single Premium Immediate Annuity (SPIA). Some fixed immediate annuities are offered with inflation-adjusted payments or graded payments that rise at a fixed rate, of for example, 3% annually. However, these options reduce the initial payment received but with the anticipation that payments will grow steadily over time. If the income stream is variable, it is considered a variable immediate annuity. Like deferred variable annuities, your money is put into subaccounts. These subaccounts can be invested in stock or bond funds. Payments will fluctuate based on the underlying subaccounts. With funds invested in stocks, it is possible that payments could grow at a rate higher than can be achieved by fixed immediate annuities.

Source: Based on The Individual Annuity: A Resource in Your Retirement [used with permission of bob90245]