Types of Annuities

There are two basic types of annuity contracts. The kind of annuity you choose to buy determines when benefit payments will begin.

Immediate annuities are generally purchased by people of retirement age. Such plans provide income payments at once or soon after purchase. They are usually purchased with a lump sum payment.

Deferred annuities are plans under which you arrange to have income payments start at some future date. Interest builds up on the money contributed. Such plans are often used by younger people to save money for retirement. These plans have become popular in good part because of the tax-deferred buildup during the accumulation period, the time during which you pay money into the annuity contract. (See "How About Taxes?")

If you buy a deferred annuity with a lump sum, it is known as a "single-premium deferred annuity." You can, however, pay for your deferred annuity over a period of years. Typically, this type of contract allows flexibility in premium payments. Except for the first year premiums may vary from year to year, with no requirement that any specified amount be paid in any given year. Such a contract, called a "flexible premium retirement annuity," can be used as an Individual Retirement Account.

Under either form of deferred annuity, if you die before the annuity payments begin, the accumulated value of your contract is paid to your designated beneficiary.

You can also convert the cash value of your life insurance policy to an annuity. For example, if you are over 65 and your children are out of school and are financially self-sufficient, you may now feel you no longer need all of your life insurance coverage. Your life insurance policy probably contains an option allowing you to convert its cash value to a life time income.