Growth, Protection, and Income: Understanding the Different Types of Annuities

Growth Annuities

Growth annuities are designed for those who are focused on capital appreciation. These products typically offer market-based returns and come with varying levels of risk and fees. 

Variable Annuities (VA)

Variable Annuities are structured to provide you with growth potential through a wide array of sub-account options that are similar to mutual funds. The key characteristics include:

• Market Risk: The holder retains market risk. The annuity's value fluctuates based on the performance of the chosen sub-accounts. 
• Customization: Optional riders can provide features like income and death benefits. Riders are essentially optional add-ons you pay for such as an enhanced death benefit.
• Costs: VAs are typically the most expensive annuity type, with multiple layers of fees. These fees are generally in exchange for optional guarantees provided by the insurance company. These include mortality and expense fees, sub-account management fees and rider charges⁴. Total costs can reach 3-4% annually.

This type of annuity is best suited for those comfortable with some market volatility who are seeking long-term tax-deferred growth, optional income and death benefit guarantees.

Protection Annuities

These annuities prioritize the safety of principal while still offering modest growth or income potential. They are ideal for more financially conservative people looking to avoid exposure to the ups and downs of the market. 

Fixed Annuities (FA) and Multi-Year Guarantee (MYG) Annuities 

• Principal Protection: Premiums are placed into the insurance company's general account and are protected from market losses (except in the case of surrender charges when exceeding annual penalty-free withdrawals)⁴.
• Guaranteed Interest: The insurer promises a fixed rate of return for a set period—e.g., 4% over 5 years.
  
• Lower fees: Fixed Annuities typically have low to no fees.

MYG Annuities are often compared to CDs but with better tax treatment in non-qualified accounts. They are best for those looking for a predictable return with minimal risk.

Fixed Indexed Annuities (FIA)

FIAs offer principal protection with potential for higher returns than traditional fixed annuities:

• Index-Linked Growth: Returns are tied to an index, such as the S&P 500, but without direct investment.
• Customization: The ability to add on riders like income and death benefits.
• Interest Crediting Methods: A variety of crediting methods may be available on an FIA. One of the most common is point-to-point, which compares the index value at the beginning of a period to the index value at the end of a period. The difference between the two values is used to determine interest earned.
• Limits on Returns: Earnings are often limited in exchange for downside protection and other guarantees. Cap rates and participation rates both set the amount of index gains that can be used for interest earned. A cap rate is the maximum interest that can be credited in a period – e.g., with an 8% cap, even if the index gains 10%, only 8% is credited. A participation rate determines how much of the index gain is credited - e.g., with a 60% participation rate and a 10% index gain, 6% is credited.

These annuities are ideal for those seeking a balance between safety and growth. 

Registered Index-Linked Annuities (RILA)

RILAs offer a hybrid solution that combines growth potential with a degree of downside protection:

• Partial Risk Exposure: Holders take on limited losses, defined by either a buffer (e.g., the insurer absorbs the first 10% of losses) or a floor (e.g., maximum loss is capped at 20%).
• Index-Linked Growth: Returns are tied to an index and often offer higher caps or participation rates than FIAs. Similar to FIAs, your money is not directly invested in the index.

RILAs are suitable for moderate-risk planners seeking better growth than traditional fixed products, without full exposure to the market.

Income Annuities

Income annuities are primarily designed to generate a reliable stream of income, either immediately or in the future. This is the type of annuity people typically think of when they hear the word “annuity." Income annuities help manage longevity risk by ensuring payments continue for life and can also be structured for payments to last for a set period. These are intended to supplement other retirement income like a 401(k), Social Security or pensions to cover essential or discretionary expenses.

Single Premium Immediate Annuity (SPIA)

SPIAs convert a lump-sum premium into an income stream that starts almost immediately—typically within 30 days.

• Payment Structure: Payments can be for a set term (e.g., 10 or 15 years) or for life.
• Tax Treatment: Income payments consist of both interest (taxable) and return of premium (non-taxable) for non-qualified accounts. This is called an exclusion ratio. 
  

SPIAs are ideal for retirees looking to supplement other sources of retirement income immediately.

Deferred Income Annuity (DIA)

DIAs allow you to invest now and begin receiving income at a future date—typically 13 months to 30+ years later.

• Tax Treatment: Income payments consist of both interest (taxable) and return of premium (non-taxable) for non-qualified accounts. This is called an exclusion ratio.
• Payment Structure: Payments can be for a set term (e.g., 10 or 15 years) or for life.

DIAs are well-suited for retirement planning when income will be needed at a later stage. 

Qualified Longevity Annuity Contract (QLAC)

A QLAC is a special type of deferred income annuity designed for use in qualified retirement accounts (e.g., IRAs, 401(k)s). They can help shield a portion of your qualified assets from Required Minimum Distributions (RMD) and generate guaranteed income later in life.

• Contribution Limit: Up to $210,000 can be allocated.
• No RMD Impact: Not subject to Required Minimum Distributions and income can begin as late as age 85.
  
• Longevity Planning: Ideal for planning income in the later stages of retirement, with deferral periods ranging from 10 to 30 years.
  

QLACs are attractive for retirees who want to defer taxes and ensure income in their 80s and beyond. 

Annuities can play a critical role in a well-balanced retirement plan, offering a range of solutions from growth and protection to guaranteed lifetime income. Whether you're a growth-focused planner, a conservative saver, or someone looking to secure a dependable income stream for life, there's likely an annuity designed to meet your needs. A direct MYG Annuity from American National Insurance Company can be a smart addition to your money management strategy and help plan for your retirement.

¹Withdrawals may be subject to Federal/State income tax and, if taken prior to age 59½, an additional 10% IRS penalty may apply. Neither the Company nor its agents and representatives can provide tax, legal or accounting advice. Client should consult their own attorney or tax advisor about their specific circumstances. American National Insurance Company, headquartered in Galveston, Texas is licensed to conduct business in all states except New York. Business is conducted in New York by American National Life Insurance Company of New York, headquartered in Glenmont, New York. Each company has financial responsibility only for the products and services it issues. Not a deposit. Not FDIC insured. May lose value.

²Information herein is not intended to be legal or tax advice. You should consult with your own attorney and tax advisor for your specific circumstance.  Current U.S. tax law provides that earnings from an annuity are taxable only upon withdrawal as ordinary income. Any withdrawals in excess of the surrender free amount are subject to surrender charges or market value adjustments.

3Penalty-free withdrawals allow up to 10% of the annuity value at the beginning of the year to be withdrawn annually, free of surrender charges. Any withdrawals, including interest-only withdrawals, will reduce the amount of interest credited to your contract. Withdrawals of earnings are subject to income tax. A 10% IRS penalty may be imposed for withdrawals before age 59½.

⁴Surrender charges may apply if withdrawals exceed the annual penalty-free withdrawal limit. Waivers for Confinement, Terminal Illness, and Disability may allow access to money without any surrender charges, any applicable market value adjustments, or excess interest deduction.  Terminal and Confinement Waivers are not available in California.