What is an Annuity – State Farm®

There are two main ways to categorize annuities: immediate vs. deferred annuities and fixed vs. variable annuities. The immediate vs. deferred category has to do with when your income payout begins. The fixed vs. variable category has to do with how your contributions are invested.

Immediate Annuity vs. Deferred Annuity

With an Immediate Annuity, your money provides guaranteed payments to you that begin soon after you make your initial payment. Depending on the tax-qualified or non-tax-qualified status of your annuity, a portion or the entire payment can be included in your taxable income. The owner can elect to receive guaranteed payments for life, or elect payments to be made over a specified length of time (period certain).

With a deferred annuity, your income payments are usually put off for a period of time allowing the money you've invested to earn interest generally tax-deferred. You choose when you want to start receiving income payments — typically, upon retirement.

Acceleration of Payments

For Guaranteed Income "immediate annuities," an Acceleration of Payments Provision is available. This provision allows remaining certain period income payments to be accelerated after the first policy year. If the unexpected happens

(home repair, medical bills, or family emergency), it's nice to know you have options. Minimums apply, and partial accelerations are limited to one per policy year and must be at least $5,000. Annuity income payments will be reduced, and a market value adjustment may apply. Acceleration of Payments is not available in NJ, OR, PA, TX, and WA. Contact your local State Farm® agent for specific details and restrictions.

Fixed Annuity vs. Variable Annuity

With a Fixed Annuity, money is placed in fixed-rate investments such as bonds, where it will earn a fixed interest rate for a certain period of time. For most fixed annuities, a minimum interest rate is guaranteed. With a Fixed Annuity, the insurance company is taking the investment risk.

With a Variable Annuity, money is placed in market-based investments. This may include stocks, bonds, mutual funds, or money markets. You may have the option to move the money around among the different investments. In addition, the rate of return can vary based on the performance of the investments. With a Variable Annuity, the risk is taken by the annuitant, rather than by the insurance company.

Category: Annuity

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