Issue link: https://resources.envestnet.com/i/1527488
Annuities as an Asset Class for Fee-Based Advisors l 13 © Envestnet 2022 An even more recent development is structured annuities that behave a lot like index annuities, but which can experience losses. These are technically a type of variable annuity, and they go by many names including buffered annuities, variable index annuities, or registered index-linked annuities (RILAs). Finally, variable annuities could include subaccount options that provide fixed returns in the same manner as a fixed annuity, but the distinction is that variable annuities position the assets in investment subaccounts, unlike fixed annuities that hold them as part of the insurance company's pooled general account. One other potentially confusing way to classify annuities is whether they are immediate or deferred. This distinction is relevant because it affects the tax treatment for annuities, as will be discussed in Chapter 10. The confusion relates to how these terms are used in two different ways with annuities. Formally, the classification is not related to when guaranteed income begins, but rather to when the act of annuitization takes place. Some deferred annuities could provide income immediately through structured lifetime payments, while some immediate annuities may defer income payments. For the former, the variable annuities and index annuities with income riders that we discuss are both types of deferred annuities, even if guaranteed distributions start immediately. The reason they are still called deferred annuities in this case is that technically the contract does not annuitize unless the contract value of the underlying assets has fallen to zero. Meanwhile, for immediate annuities the act of annuitizing the assets takes place at the time the premium is paid. There is no liquidity for the underlying premiums past that stage. "Immediate" immediate annuities, such as single-premium immediate annuities (SPIAs), begin income payments within one year of annuitization, while deferred immediate annuities begin income payments at least one year past the date of annuitization. Since the name "deferred immediate annuity" is so confusing, a more common alternative name for them is deferred income annuity (DIA). Regarding the more confusing name, though, the immediate part of the name refers to immediate annuitization, and the deferred part of the name refers to the delay in starting the annuitized payments. One other potentially confusing way to classify annuities is whether they are immediate or deferred. © Envestnet 2022