Types of Annuities Explained: A Tennessee Shopper's Guide

Types of Annuities Explained: A Tennessee Shopper's Guide

Confused by annuity jargon? This Tennessee guide breaks down fixed, fixed index, variable, MYGA, and SPIA contracts so you can shop with confidence.

Full written article: Types of Annuities Explained: A Tennessee Shopper's Guide

Tennessee Annuity Rates

Transcript

SPEAKER_00 0:03

Welcome to the Tennessee Annuity Show. I'm Jessica.

SPEAKER_01 0:06

And I'm Caleb. We break down complex annuity products in plain English, fixed annuities, indexed annuities, income annuities, all of it.

SPEAKER_00 0:13

We cover the products, the fine print, and the questions you should ask before you sign anything.

SPEAKER_01 0:18

Quick note before we start. This show is for general information only and is not financial, tax, or legal advice. Annuity guarantees depend on the issuing insurance company's ability to pay claims. Talk with a licensed professional before making decisions about your retirement income.

SPEAKER_00 0:33

All right, let's get into today's episode. So I had a conversation with my cousin last month. She's 61, lives outside of Knoxville, just started seriously thinking about retirement, and she called me completely overwhelmed. She said she'd spent two hours on the internet and now she had a list of terms she didn't understand: fixed, indexed, variable, myga, SPIA, and she goes, Jessica, are these actually different things, or are insurance companies just making up words?

SPEAKER_01 1:07

Uh-huh. Honestly, that's a fair question. Uh because from the outside, it can look like alphabet soup, but they really are meaningfully different products. Like not just different flavors of the same thing, different structures, different risk profiles, different use cases entirely.

SPEAKER_00 1:24

And that's exactly what I want to dig into today. Because um I think a lot of Tennessee shoppers are in that same spot as my cousin. They know they want some kind of retirement income product. They've heard the word annuity, and then they hit this wall of jargon.

SPEAKER_01 1:42

Right. And the stakes are real. These are long-term contracts. We're talking surrender periods that can run five, seven, ten years. If you pick the wrong structure for your situation, unwinding it can be expensive. So getting your bearings before you sit down with an agent actually matters a lot.

SPEAKER_00 2:01

Okay, so let's start at the beginning. If someone has never touched an annuity before, what's the first thing they need to understand?

SPEAKER_01 2:11

Start with the fixed annuity. It's the simplest form of the contract. You hand a premium to an insurance carrier, they credit a set interest rate to your account for a defined period, and your principal is not exposed to market swings. That's it. No watching a ticker, no sub accounts, no index tracking.

SPEAKER_00 2:29

Um so it's kind of the baseline, the thing everything else gets compared to.

SPEAKER_01 2:34

Exactly. And for a lot of retirees in Tennessee, especially people who've already been through the stress of watching a portfolio drop in a bad market year, that predictability is genuinely appealing. You know what rate you're getting, you know your principal isn't going to shrink because the market had a bad quarter.

SPEAKER_00 2:49

Now, when you say set interest rate for a defined period, is that what a Miga is? Because I feel like those terms get used almost interchangeably sometimes.

SPEAKER_01 3:00

Good catch, and they are closely related. A MIGA, multi-year guaranteed annuity, is actually a specific type of fixed annuity. The defining feature is that the contractual rate is locked in for the entire term. So if you buy a five-year miarga at, say, four and a half percent, that rate holds for all five years. There's no repricing at year two or year three.

SPEAKER_00 3:20

Which is different from some other fixed annuities where the rate can adjust after the first year.

SPEAKER_01 3:25

Exactly right. Some traditional fixed annuities have a first-year rate and then a renewal rate that the carrier sets going forward. Uh with a MYGA, what you see at signing is what you get for the full term. That's why Tennessee shoppers often compare them to bank CDs.

SPEAKER_00 3:40

I was going to bring that up. The CD comparison. I hear it constantly. Are they actually similar?

SPEAKER_01 3:46

Similar in concept, different in the details. Both give you a defined rate over a defined period, but the tax treatment is different. Interest in a MUGA typically grows tax deferred, whereas CD interest is usually taxable in the year it's credited. And the early withdrawal rules are different too. A CD has a penalty, but a MyGA has surrender charges, which are a different animal.

SPEAKER_00 4:09

Right. And surrender charges can be more significant depending on the contract.

SPEAKER_01 4:13

They can be. Which is why when you're shopping MIGA rates in Tennessee, you can't just look at the rate in isolation. You have to look at the term, the surrender schedule, what the free withdrawal provisions are, because most contracts do allow you to pull out a certain percentage per year without a penalty.

SPEAKER_00 4:29

Okay. So we've got fixed annuities, we've got uh MIGAs as a subset of that. Now let's talk about fixed index annuities because this is where I think people's eyes start to glaze over.

SPEAKER_01 4:40

Yeah, and it's because there are more moving parts. So a fixed index annuity, FIA, uh, credits interest based in part on the performance of an external index. Uh the S P 500 is the most common one people reference, but here's the critical thing: your money is not actually invested in that index.

SPEAKER_00 4:59

That trips people up constantly.

SPEAKER_01 5:01

It does. Think of it like this the index is more like a measuring stick than a bucket your money sits in. The carrier uses the index's movement to calculate how much interest to credit to your account. But your principal is held by the insurance company, not in the market.

SPEAKER_00 5:16

So what does that mean practically? Like if the SP has a great year, do you get the full gain?

SPEAKER_01 5:21

Almost never the full gain, no. That's where participation rates, caps, and spreads come in. A participation rate might say you get 60% of the index's upside. A cap might say you get a maximum of 8%, no matter how well the index does. A spread might say the carrier takes the first two percent of gains and you get the rest.

SPEAKER_00 5:40

So there's a ceiling on the upside.

SPEAKER_01 5:42

There is. But the trade-off, and this is the key trade-off, is that when the index falls, your account value doesn't fall with it. In a down year, you might get zero interest credited, but you don't lose principal due to market movement.

SPEAKER_00 5:55

Zero feels painful in a good market year, but it feels pretty great when the market is down twenty percent.

SPEAKER_01 6:01

That's exactly the psychology of it. And that's why FIAs tend to attract people who want more growth potential than a straight fixed annuity, but genuinely aren't comfortable with full market exposure. They're sitting in that middle ground.

SPEAKER_00 6:13

Now I want to make sure we're being clear here and because I know this matters. We're not saying FIAs are better or worse than fixed annuities. It depends on the person, right?

SPEAKER_01 6:23

100%. Someone who's 68 and needs stable, predictable accumulation, with no surprises, might be perfectly served by a straightforward fixed annuity or a my guy. Someone who's sixty-two has a longer runway before they need income, and can tolerate a zero credit year in exchange for more upside potential. An FIA might make more sense for them to explore. It's really about matching the structure to the person's timeline and temperament.

SPEAKER_00 6:47

Okay, so then there's the variable annuity. And I want to be honest, this one is where I feel like the conversation gets complicated fast.

SPEAKER_01 6:55

It does, because a variable annuity is genuinely a different animal. With a fixed or fixed index annuity, the insurance company is absorbing the market risk on your behalf. With a variable annuity, you're the one bearing that risk directly.

SPEAKER_00 7:08

Because your money is actually in the market.

SPEAKER_01 7:10

Right. Your premium goes into sub accounts that function similarly to mutual funds. Your account value goes up when those subaccounts perform well and goes down when they don't. There's no floor protecting your principal from market losses the way there is in an FIA, unless you've added a specific writer for that, which is a whole separate conversation.

SPEAKER_00 7:30

And variable annuities are regulated differently, aren't they? Like the person selling one has to have different licenses.

SPEAKER_01 7:37

Yes. This is an important distinction. Variable annuities are regulated as securities in addition to being insurance contracts. So the agent selling one needs a securities license on top of an insurance license. They operate under a different disclosure and suitability framework. That's not a reason to avoid them, but it is a reason to understand what you're buying.

SPEAKER_00 7:58

And just to be clear, past performance of those subaccounts doesn't tell you what's going to happen going forward.

SPEAKER_01 8:04

Correct. Past index or subaccount performance doesn't predict future results. That's not just a legal disclaimer. It's genuinely true and worth internalizing before you look at any historical return figures.

SPEAKER_00 8:15

So who is a variable annuity actually designed for? Like, is there a profile?

SPEAKER_01 8:20

Generally, someone with a longer time horizon who wants market participation, but also wants it inside an insurance contract, maybe for the death benefit features, or the annuitization option down the road, but they're not appropriate for everyone. And that's not me being cagey. That's just the reality. Someone who needs income in three years and can't afford a bad sequence of returns is probably not the right fit.

SPEAKER_00 8:41

Okay, let's pivot to something I think a lot of people in Tennessee actually need to hear about. The spia. Single premium immediate annuity. Uh, because I think this one gets overlooked.

SPEAKER_01 8:53

It does get overlooked, and it's actually one of the most straightforward concepts once you understand it. You hand over a lump sum, a single premium, and the insurance company starts sending you income payments, typically within 30 days of the contract being issued.

SPEAKER_00 9:08

So there's no accumulation phase. You're not waiting years to flip a switch. It's immediate.

SPEAKER_01 9:13

Exactly. It's designed for people who need income now. Think about someone who just retired from a job in Memphis or sold a business in Knoxville and suddenly needs to replace a regular paycheck. A SPIA can do that.

SPEAKER_00 9:24

My neighbor, 63, just sold his landscaping business last year. He was in exactly that spot. He had a lump sum from the sale and no pension, no regular income coming in. He was asking me what to do with it, and I honestly didn't know enough to help him at the time.

SPEAKER_01 9:42

That's a classic SPIA scenario. The trade-off, though, and this is important, is that once you hand over that premium, the terms are largely fixed. You've converted a lump sum into an income stream, and you generally can't reverse that or pull the money back out as a lump sum later.

SPEAKER_00 9:57

So liquidity goes out the window?

SPEAKER_01 9:59

For the most part, yes. Which is why a SPIA usually shouldn't be your only asset. It's a tool for a specific job. Reliable income starting now, not a place to park money you might need access to.

SPEAKER_00 10:10

That's a really important framing. Okay, so we've talked about fixed mega, fixed index, variable, SPI. Um what about deferred annuities? Because that term seems to cut across all of these.

SPEAKER_01 10:24

It does, and that's actually the key insight. Deferred isn't a separate product type. So you how it's a structural feature. A deferred annuity is any annuity where there's a gap between when you put the money in and when you start taking income. The accumulation phase comes first, the distribution phase comes later.

SPEAKER_00 10:41

So a fixed annuity can be deferred, an FIA can be deferred, even a variable annuity can be deferred.

SPEAKER_01 10:47

Right. And a MIG is almost always deferred by nature. You're letting it grow for the term before you do anything with it. The SPIA is the exception because it skips the accumulation phase entirely.

SPEAKER_00 10:59

That actually clears something up for me. I've seen people get confused because they'll hear deferred annuity and think it's a specific product, when really it's describing the timing structure.

SPEAKER_01 11:10

Exactly. And understanding that two-phase structure, accumulation, then income, is foundational. Because when you're comparing contracts, one of the most important questions is how long is each phase? And what happens at the transition? Does the contract annuitize automatically? You know, can you take systematic withdrawals instead? And what are the payout options?

SPEAKER_00 11:29

And those answers vary a lot by product.

SPEAKER_01 11:31

Significantly. Which is why you can't just look at the interest rate or the index crediting method in isolation. You have to understand the whole life cycle of the contract.

SPEAKER_00 11:38

Let me ask you something that I think is the awkward follow-up question nobody wants to ask. If someone goes in to talk to an agent without understanding any of this, like truly zero background, what's the risk? Is it that they just buy the wrong thing?

SPEAKER_01 11:56

That's the risk. Yeah. And wrong thing can mean a lot of different things. It might mean they buy a 10-year surrender period contract when they actually need liquidity in four years. Or they buy a spIA when they're 62 and don't actually need income until 67, and now they've given up flexibility for five years of payments they didn't need yet.

SPEAKER_00 12:16

Or they buy a variable annuity when they really can't stomach watching the account value drop.

SPEAKER_01 12:22

Right. And then they panic, try to surrender early, and face charges that eat into the very principle they were trying to protect. It's not that any of these products are bad, it's that a mismatch between the product and the person's situation is where the real damage happens.

SPEAKER_00 12:37

I want to go back to something you said earlier about surrender periods, because I don't think we unpacked that enough. Five to ten years is a long time.

SPEAKER_01 12:45

It is. A surrender period is the window during which the carrier charges you a fee if you withdraw more than the free withdrawal amount. So if you have a seven-year surrender schedule and you need a large chunk of that money in year three, you're going to pay for it.

SPEAKER_00 12:58

And those charges can be substantial in the early years.

SPEAKER_01 13:01

They can start at 7%, 8%, 9% in year one and step down over the surrender period. So the math on an early exit can be pretty painful. That's why matching the surrender period to your actual timeline is one of the most practical things you can do when you're shopping.

SPEAKER_00 13:15

Okay, so let's say someone's listening to this and they're starting to get their bearings, they understand the basic categories. What's the mental framework for figuring out where to start?

SPEAKER_01 13:26

I'd say start with two questions. One, when do I need income? If the answer is now or within a year, you're probably looking at SPIA territory. If the answer is five or ten years from now, you're in deferred annuity territory, and then you need to figure out which flavor.

SPEAKER_00 13:41

And the second question?

SPEAKER_01 13:43

How do I feel about my account value fluctuating? If the idea of seeing it go down, even temporarily, keeps you up at night, a variable annuity is probably not your starting point. If you want some growth potential, but you need a floor under your principal, you're in fixed or fixed index territory. If you just want to know exactly what you're getting and for how long, a my J might be the most straightforward place to start.

SPEAKER_00 14:03

It's almost like a decision tree.

SPEAKER_01 14:05

That's a good way to put it. And the reason I frame it that way is that the product types aren't competing for the title of best annuity. They're solving different problems. A SPIA isn't better or worse than an FIA. They're designed for different situations.

SPEAKER_00 14:20

Can I throw a scenario at you? Because I think this is where it gets real for people.

SPEAKER_01 14:24

Go for it.

SPEAKER_00 14:25

Picture a couple, both 65, living in Nashville. They've got $200,000 they want to deploy into something that gives them income. One of them has a pension, so they're not desperate for immediate income, but they want to know something is growing for them and they can turn it on in seven or eight years.

SPEAKER_01 14:43

Okay, so they've got a runway. They don't need income now. They've got some baseline covered by the pension, and they want growth with the option to flip a switch later. That's a deferred annuity scenario. And depending on their comfort level with complexity and market-linked crediting, they might look at a fixed annuity, amigo with a term that aligns with their timeline, or a fixed index annuity.

SPEAKER_00 15:02

And a variable annuity?

SPEAKER_01 15:03

Possibly if they have a higher risk tolerance and a longer horizon than they're letting on. But at 65 with 200,000, they're specifically earmarking for future income. Most people in that position aren't looking to take on full market risk with that money. That's a conversation for a licensed agent who knows their full picture.

SPEAKER_00 15:20

Right. And that's the other thing I want to make sure we say clearly. We can lay out the framework, but nobody listening to this should walk away thinking they've got enough to make the actual decision on their own.

SPEAKER_01 15:31

Absolutely. Your retirement timeline, your income needs, your tax situation, your other assets, your comfort with complexity, all of that factors in. We can give you the vocabulary and the conceptual map, but a licensed annuity agent in Tennessee is the one who can actually look at your specific circumstances and help you figure out which structure makes sense.

SPEAKER_00 15:51

And honestly, I think that's the whole point of doing this kind of homework first. You're not trying to become an expert, you're trying to ask better questions.

SPEAKER_01 15:59

Aaron Powell That's exactly it. The difference between someone who walks in knowing the difference between a moiga and an FIA versus someone who doesn't, um, the person who knows can actually push back, can ask about the participation rate, can ask what the surrender schedule looks like in year four. That's a much more productive conversation.

SPEAKER_00 16:16

Aaron Powell And you're less likely to end up with something that doesn't fit just because you didn't know what questions to ask.

SPEAKER_01 16:23

Which I mean, and I say this gently, is how people end up in a 10-year surrender period when they needed a five-year one. Not because anyone was trying to mislead them, but because they didn't know to ask.

SPEAKER_00 16:33

Okay, I want to do a quick recap because we've covered a lot of ground. Can we just run through the main types quickly, but like a one-sentence version of each?

SPEAKER_01 16:42

Sure. Fixed annuity, set interest rate, no market exposure, simple and predictable. Myga. A specific kind of fixed annuity where the rate is locked for the entire term. Two to ten years, typically. Fixed index annuity, interest linked to an index like the SP, but your principal isn't in the market, you get some upside potential with a floor against losses. Variable annuity. Your money is actually in market subaccounts, so your value goes up and down with the market, and it's regulated as a security.

SPEAKER_00 17:15

And then SPIA and deferred.

SPEAKER_01 17:17

SPIA. Lump sum in. Income starts almost immediately, designed for people who need a paycheck now. And deferred is the structural concept. Accumulation phase first, income phase later, which applies to most of the others. Every annuity goes through those two phases. The SPIA just collapses the accumulation phase down to almost nothing.

SPEAKER_00 17:37

That's a really clean way to think about it. And I think the thing that keeps coming back to me is that none of these are inherently good or bad. It's about fit.

SPEAKER_01 17:46

That's the whole thing. I've seen people get really attached to one type because they read something online or a friend told them about it. And then they go in with their mind made up before they've even talked through their actual situation. The product should follow the need, not the other way around.

SPEAKER_00 18:01

Um, which is probably the most important thing we've said today, honestly.

SPEAKER_01 18:05

I'd put it right up there with read the surrender schedule before you sign anything. Which, look, I know that sounds obvious, but you'd be surprised how often it doesn't happen.

SPEAKER_00 18:14

Huh. Fair point. Okay, one last thing I want to touch on because Tennessee specifically comes up a lot in the context of annuity shopping. Is there anything particular about the Tennessee market that shoppers should know?

SPEAKER_01 18:28

Tennessee residents have access to a pretty wide range of carriers and products. That's genuinely a good thing. Uh, but that variety only helps if you know what you're comparing. More options isn't automatically better if you can't tell the difference between a five-year myga and a seven-year FIA with a similar headline rate.

SPEAKER_00 18:45

Because the headline rate doesn't tell the whole story.

SPEAKER_01 18:48

It never does. The rate is one data point the surrender schedule, the crediting method, the free withdrawal provisions, the payout options, those are the rest of the story. And that's true whether you're shopping in Nashville, Knoxville, Memphis, or anywhere else in the state.

SPEAKER_00 19:04

So the homework you do before you walk in the door, understanding these types, knowing the vocabulary, that's what lets you actually use all those options effectively.

SPEAKER_01 19:16

Exactly. You're not trying to become an insurance actuary. You're just trying to be an informed buyer. And there's a real difference between those two things.

SPEAKER_00 19:27

That's it for today's Tennessee Annuity Show.

SPEAKER_01 19:29

If you have questions about your specific situation, talk to a licensed advisor.

SPEAKER_00 19:33

Visit Tennessee AnnuityRates.com for show notes or to get matched to an advisor.

SPEAKER_01 19:38

We'll see you next time.