Annuities: 5 Things You Should Know
Annuities come in many varieties—deferred, immediate, variable, fixed, and fixed-index. Income annuities provide guaranteed lifetime income, either now or in the future, while other types of annuities help defer taxes or provide protection from stock market losses.
Today, with pension plans becoming less common, many retirees are looking to annuities as an option to replace income streams. However, not all annuities are alike, and some may not be appropriate for you.
Let’s take a look at the top 5 things you need to know about annuities so you can determine if you should invest in them:
- What is an annuity?
- Why buy an annuity?
- How does an annuity work?
- What is the difference between annuities and life insurance?
- What are the different types of annuities?
1. What is an annuity?
An annuity is a contract between you and an insurance company to cover specific goals, such as principal protection, lifetime income, legacy planning, or long-term care costs.
Some annuity contracts provide a way to save for retirement; others can turn your savings into a stream of retirement income. Still, others do both.
2. Why buy an annuity?
You buy an annuity because it does what no other investment can do—it provides guaranteed income for the rest of your life, no matter how long you live. For this reason, annuities make popular retirement planning strategies.
Annuities have no contribution limits, so you can save as much as you want.
3. How does an annuity work?
In return for the money you pay to buy the annuity, which is called a premium, the insurance company will give you a series of payments guaranteed to last for a period of time you select in advance. They can start immediately or be postponed for years, even decades. The premium-paying period is known as the accumulation phase.
Unlike other types of insurance, you don’t pay annuity premiums indefinitely. Eventually, you stop paying the annuity, and the annuity starts paying you. When this happens, your contract is said to enter the payout—or distribution—phase.
4. What is the difference between annuities and life insurance?
Life insurance and annuities are both issued by insurance companies; however, they serve entirely different purposes.
Life insurance is designed to provide benefits to your loved ones after you die, while annuities are designed to provide a benefit while you are still living. Typically, the benefit from an annuity is a guaranteed stream of income.
5. What are the different types of annuities?
There are two main types of annuities: deferred and immediate.
Deferred annuities provide tax-advantaged savings and lifetime income and are better for people still saving for future retirement.
An immediate annuity begins paying income (almost) immediately and is best for retirees who want to receive payouts right away.
Within the deferred and immediate categories are fixed and variable annuities.
Here is an overview of the different types of annuities:
- Deferred annuity: an annuity that begins paying income at a future date determined by the owner.
- Immediate annuity: an annuity that is annuitized, meaning converted to an income stream for the buyer, immediately.
- Variable annuity: an annuity where its performance and eventual return is based on underlying investments in mutual funds.
- Fixed annuity: an annuity that pays a guaranteed minimum rate of return and provides a fixed series of payments under conditions determined when you buy the annuity.
- Fixed-indexed annuity: an annuity with a minimum guaranteed rate of return with total returns based on an underlying index. Often the interest rate is fixed for a number of years and then changes periodically based on current rates. Payouts can be for an entire lifetime, or you can choose another time period.
Annuities aren’t for everyone. If you aren’t worried about running out of income, you may not need an annuity. But, if you’re healthy and you want the security of a stream of income you can’t outlive, or you want to provide for your spouse or heirs, you may benefit from an annuity.
Contact Your Retirement Income Planning Specialist
As your retirement income planning specialist, I would like to assist you in mapping out your finances during your complimentary, no-obligation appointment. Let me show you how I can make sure you spend your golden years the way you’ve always dreamed.
For more information, feel free to contact me. I look forward to serving you.