When you give the issuing insurance company a lump sum, you buy a single-premium annuity. The issuing company may set minimum and maximum amounts they will allow. You may also buy a flexible-premium annuity. This annuity type enables you to determine the timing and amount of additional payments.

If you want income to start right away, you will need an immediate annuity. An immediate annuity is a type of contract which begins paying out within one annuity period - e.g., one month or one year, after it is purchased - and pays principal and earnings in equal payments over some time period.

For example, if you schedule your income payments to be paid monthly, the first payout will occur one month after your purchase. Retirees or soon-to-be retirees typically buy immediate annuities with money they have already accumulated for retirement. This contract is purchased with a single premium.

On the other hand, payouts from deferred annuities (a type of contract used to accumulate money over a number of years) usually begin many years after the insurance company issues the contract. You may wait to select your payout options later. When you need the funds, you may take your money either in a lump sum, through systematic withdrawals or by electing a payout option to annuitize - converting the deferred annuity you have accumulated into a stream of regular payments. Because deferred annuities are accumulation vehicles, individuals of all ages purchase them for personal retirement savings funds and for special tax-deferred programs such as IRAs, Keogh plans and tax-sheltered annuities. These contracts can be either a single- or flexible-premium type.

Annuities are long-term investments to help you accumulate assets on a tax-deferred basis. When purchased to fund a tax-qualified plan, which already provides tax deferral, annuities provide other unique benefits such as options for guaranteed lifetime income you cannot outlive.

Under fixed annuity contracts, the life insurance company pays an interest rate for a specific period at the time the annuity is purchased. At the end of each guaranteed period, the current rate (the interest rate currently paid on a fixed annuity contract for a specific period of time) is raised or lowered based on the company’s interest rate policy.

Fixed annuities transfer the market risk from the investor to the life insurance company.

A type of fixed annuity, called an indexed annuity, grows at an interest rate determined by a formula based on the rise or fall of a market index, such as the Standard & Poor’s 500. Indexed annuities generally guarantee you will get your principal back at the end of your contract, plus a guaranteed minimum interest rate. While indexed annuities offer the opportunity for higher returns than traditional fixed annuities, they may not pay as much as an investment in equities, equity mutual funds or even in variable annuities that invest in equities. However, they can offer protection against loss in the event of a market downturn, whereas a direct investment in equities such as through stock, mutual funds or a variable annuity includes risk of loss, including principal.

Variable annuities provide the opportunity to purchase shares in equity investments, although most VA contracts also include money market options as well as fixed interest options where your principal and a minimum rate of interest is guaranteed. VA equity investments are riskier than the guaranteed interest of fixed annuities, but provide opportunity for market growth. Variable annuities also include risk of loss, including principal. Unlike investments in retail mutual funds, you may switch among variable annuity investment options without any tax consequence or trade charges (up to a maximum number of trades per year). Like all annuities, variable annuities defer taxes on accumulated assets. (There is no additional tax deferral to that provided by tax-qualified plans.) Also, variable annuity equity assets are held by the insurer in a segregated account that is protected from any claims of the insurer's creditors. Variable annuities are securities, so are only sold pursuant to a prospectus from representatives licensed with the National Association of Securities Dealers.

Whether you choose a fixed, variable, indexed or other type of annuity contract depends on your own personal risk tolerance and the product features.