In a world where people are living longer, often that means planning for a longer retirement. As an insurance agent, I get asked, “Is an annuity a good option for me?”
There is no clear-cut answer to that question. There are a lot of options when it comes to annuities. Plus, understanding your long-term goals can help you make the right decision. First, let’s take a look at what annuities are.
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 retirement income stream. Still, others do both. 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 possible.
How Does an Annuity Work?
In return for the money you pay to buy the annuity, 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.
When Is an Annuity a Good Idea?
It comes down to your financial path and understanding the key difference between annuities and equity investments. Remember, annuities are insurance, and equity investments are growth vehicles.
According to a 2022 CNBC report, the average immediate annuity payouts increased 11% for men and 13% for women in the first half of 2022. In addition, sales of fixed-rate deferred annuities were up 44% over the same time, according to the insurance industry group LIMRA.
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 immediately.
Within the deferred and immediate categories are fixed and variable annuities. Click here for an overview of the different types of annuities.
Annuities are not 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.
Talk with Your Experienced Insurance Agent Regarding Annuities
Annuities aren’t for everyone, and whether you opt to use annuities in your retirement journey boils down to your overall goals. For example, 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. I offer a complimentary appointment where we can sit down and discuss your goals and dreams. Backed with years of experience, I can help you decide what option is right for you.