Group annuities are annuity contracts intended for multiple participants, typically structured as either immediate non-variable or variable annuities. These contracts start disbursing annuity payments to individuals within a group under specified conditions. Here’s an elaborated explanation of the two types:
Non-Variable Group Annuities
Definition: Non-variable group annuities are contracts in which funds accumulate based on a guaranteed crediting interest rate set by the insurer.
Interest Rate: These rates are predetermined and remain consistent regardless of the fluctuations in the broader market or the economy.
Security: Typically considered safer than variable annuities as the accumulation is based on fixed growth rates.
Variable Group Annuities
Definition: In contrast to non-variable annuities, the funds in variable group annuities fluctuate according to the investment performance of the underlying assets chosen by the policyholder.
Portfolio Selection: The policyholder selects the underlying investment portfolio, which may include stocks, bonds, or other securities, shifting the performance risk to the policyholder.
Risk and Return: Offers the potential for higher returns compared to non-variable annuities, but also comes with higher risk of losing principal.
Payment Initiation
- Both types of annuities require that payments to the annuitants start within 13 months of contract establishment. The frequency of these payments can vary and is agreed upon at the time of annuity purchase.
Regulatory References
- These types of group annuities are often subject to state laws and regulations which govern their setup and implementation. They align with principles noted within the Employee Retirement Income Security Act (ERISA), which additionally provides some protective measures for the policyholders.
Group annuities, particularly in their immediate form, are integral components of retirement planning, providing a form of financial security through regular income streams either at a fixed or variable rate depending on the structuring of the annuity. They are especially beneficial for managing the longevity risk as they guarantee income during the retirement phase.
