Annuities

An annuity is an insurance product that provides a tax-deferred fixed income stream for people seeking the security of protected income for life. Although annuities generate income — and some types of annuities offer growth potential — they are not suitable for short-term investment strategies. These products appeal to people whose objectives include long-term financial security, retirement income, diversification, and principle preservation.

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Written By : Elaine Silvestrini
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People buy annuities to create long-term income. While most often considered financial solutions for older people who are close to retirement, annuities can benefit investors of any age with a variety of financial goals.

Reasons to buy an annuity include:
  • Long-term security
  • Tax-sheltered growth
  • Principal protection
  • Probate-free estate distribution
  • Inflation adjustments
  • Death benefits for heirs
Financial expert Juliette Fairley explains what an annuity is.
Key Takeaways
  • An annuity is a customizable contract issued by an insurance company that converts an investor’s premiums into a guaranteed fixed income stream.
  • The type of annuity you purchase determines your future annuity payments.
  • The primary benefits of buying an annuity include principal protection, guaranteed lifetime income, the option to leave money to your beneficiaries and the ability to pay for long-term care.

How Do Annuities Work?

An annuity contract is a legally binding, written agreement between you and the insurance company that issues the contract. This contract transfers your longevity risk — the risk of you outliving your savings — to the insurance company. In exchange, you pay premiums as outlined in the contract.

Annuities Explained
Free-Look Period
Most annuities include a free-look period that allows a buyer to cancel the contract without incurring a surrender charge.
Riders
Riders are addendums that allow the customization of basic annuity contracts. It’s important that you understand the riders you select and are aware of their additional costs.
Beneficiaries
You can add a death benefit rider to your contract to ensure that your beneficiary receives a portion of the contract value.
Fees and Commissions
The fees and commissions for annuities vary by the type of annuity. Fixed annuities generally have the lowest fees.
Taxation
One of the most attractive features of annuities is their favorable tax treatment from the IRS. If your annuity was purchased with money that you've already paid taxes on, then only your earnings will be taxed when the money is withdrawn.

Cash Now or Cash Later

Your annuity contract will specify one of two payout options: immediate or deferred.

The option you select will depend on your financial goals. If you want to begin receiving annuity payments right away, you will choose an immediate annuity.

Alternately, if you would like to set your payments to begin at some point in the future, you will purchase a deferred annuity and specify the start date in your contract.

  • Income Now Immediate Annuities
    Funded with a single lump-sum payment

    Guaranteed monthly payouts

    Supplement your retirement savings
    Learn More
  • Income Later Deferred Annuities
    Guaranteed lifetime income that begins on the date you specify

    More income later because your money accumulates longer

    Tax-deferred premium growth
    Learn More

Types of Annuities

Different types of annuities exist to fit the diverse needs of the market. Your personal goals and objectives will determine the type of annuity that is right for you.

  • Guaranteed Income Fixed Annuities
    Earns a guaranteed rate of interest for a set period of time

    Backed by the insurance company that issued it
    Learn More
  • Growth Potential Indexed Annuities
    Earns interest based on a market index, such as the S&P 500

    Guaranteed minimum rate of return
    Learn More
  • Flexible Income Variable Annuities
    Earns interest through investments you select within the annuity

    Does not guarantee a return but offers more growth potential
    Learn More
Interested in Purchasing an Annuity?

Learn about the different types of annuities and find out which one is right for you.

Annuity Benefits

One of the key benefits of an annuity is that it allows the investor to save money without paying taxes on the interest until a later date. Annuities have no contribution limits, unlike 401(k)s and IRAs.

Another significant benefit of annuities is the creation of a predictable income stream to fund retirement. With an annuity, you don’t have to worry about outliving your savings. This is a major advantage in the post-pension age.

Your reasons for investing in an annuity should align with your unique lifestyle and financial situation.

Reasons to Buy an Annuity:
  • Tax deferred icon
    Tax-Deferred Growth
    You save money without paying taxes on the interest until a later date.
  • Money icon
    No Contribution Limits
    Unlike 401(k)s and IRAs, you set the dollar amount you invest.
  • Retirement icon
    Fund Your Retirement
    Annuities create predictable income streams for life.
  • Family icon
    Provide for Your Family
    Death benefit riders allow you to transfer your money to your loved ones.

Reduce Your Opportunity Cost

For many investors, the main objection to annuities is the risk of losing access to their money for the length of their contract. This means that in addition to the possibility that you won’t be able to cover unexpected expenses, you may miss the opportunity to take advantage of higher interest rates or to invest in the stock market.

This is where your understanding of your long-term goals comes in. Your decision to purchase — or sell — an annuity should be in alignment with your goals, and you should be comfortable with having your money locked down for a modest payout in exchange for guaranteed lifetime income.

To reduce your opportunity cost, consider a partial investment upfront. This will allow you to reserve some of your savings for unplanned expenses and give you the ability to capitalize on a potential rise in interest rates.

How to Get Started

Getting started is as easy as contacting us now. We’ll put you in touch with our partner, Senior Market Sales, for more information on securing your financial future.

  1. Contact Us
    We’ll route you to a financial expert who specializes in annuities and retirement planning.
  2. Get a Free Consultation
    Our trusted network of advisors will listen to you and guide you toward an annuity that will allow you to achieve your goals.
  3. Get Guaranteed Income for Life
    Get peace of mind knowing you’ve made a smart financial decision by securing a reliable income for your golden years.
Get a Free Consultation From a Financial Expert

Work with our trusted financial planners to find an annuity that meets your financial needs.

27 Cited Research Articles

  1. U.S. Securities and Exchange Commission. (n.d.). Variable Annuities: What You Should Know. Retrieved from https://www.sec.gov/reportspubs/investor-publications/investorpubsvaranntyhtm.html
  2. Financial Industry Regulatory Authority (FINRA). (n.d.). Annuities. Retrieved from http://www.finra.org/investors/annuities
  3. Fox Business. (2012, June 13). What Are Annuities? Retrieved from https://www.foxbusiness.com/markets/what-are-annuities
  4. Texas Department of Insurance. (2018, July). Understanding Annuities. Retrieved from https://www.tdi.texas.gov/pubs/consumer/cb078.html
  5. Insurance Information Institute. (n.d.). What are the different types of annuities? Retrieved from https://www.iii.org/article/what-are-different-types-annuities
  6. Lankford, K. (2013, June 21). 7 Annuity Mistakes to Avoid. Retrieved from https://www.kiplinger.com/article/retirement/T003-C001-S001-7-annuity-mistakes-to-avoid.html
  7. Epperson, S. (2014, October 24). Annuities for retirement: Good or bad idea? Retrieved from https://www.cnbc.com/2014/10/24/annuities-for-retirement-good-or-bad-idea.html
  8. Iacurci, G. (2018, March 31). Are annuities finally getting some respect? Retrieved from https://www.investmentnews.com/article/20180331/FREE/180339999/are-annuities-finally-getting-some-respect
  9. CNN Money. (n.d.) Ultimate guide to retirement. What is an annuity? Retrieved from https://money.cnn.com/retirement/guide/annuities_basics.moneymag/index.htm
  10. CNN Money. (n.d.) Ultimate guide to retirement. What are the advantages of annuities? Retrieved from https://money.cnn.com/retirement/guide/annuities_basics.moneymag/index4.htm
  11. Time. (n.d.). The Ultimate Guide to Retirement. What Is an Annuity? Retrieved from http://money.com/money/collection-post/2791252/what-is-an-annuity/
  12. Investopedia. (n.d.). Annuity. Retrieved from https://www.investopedia.com/terms/a/annuity.asp
  13. Kaplan, E. (2015, July 15). Annuities: The Good, The Bad and The Ugly. Retrieved from https://www.forbes.com/sites/feeonlyplanner/2015/07/15/annuities-the-good-the-bad-and-the-ugly/#485405227990
  14. Hicks, C. and Moeller, P. (2018, April 27). 15 Things You Need to Know Now About Annuities. Retrieved from https://money.usnews.com/investing/investing-101/articles/things-you-need-to-know-now-about-annuities
  15. Bundrick, H.M. (2013, December 13). Retirement 101: What Are Annuities? Retrieved from https://www.nerdwallet.com/blog/investing/retirement-planning-what-are-annuities/
  16. U.S. Securities and Exchange Commission. (n.d.). Annuities. Retrieved from https://www.investor.gov/introduction-investing/basics/investment-products/annuities
  17. CNN Money. (n.d.). Ultimate Guide to retirement. Just how common are defined benefit plans? Retrieved from https://money.cnn.com/retirement/guide/pensions_basics.moneymag/index7.htm
  18. Bureau of Labor Statistics. (2017, March). Establishments offering retirement and healthcare benefits. Retrieved from https://www.bls.gov/ncs/ebs/benefits/2017/ownership/private/table01a.htm
  19. U.S. Government Accountability office. (2016, September 8). 401(k) Plans: DOL Could Take Steps to Improve Retirement Income Options for Plan Participants. Retrieved from https://www.gao.gov/products/GAO-16-433?utm_medium=email&utm_source=govdelivery
  20. Farrell, C. (2011, July 20). GAO Likes Annuities, Investors Don’t: Here’s Why. Retrieved from https://www.cbsnews.com/news/gao-likes-annuities-investors-dont-heres-why/
  21. Godbout, T. (2018, July 31). Will Congress Enact Retirement Legislation This Year? Retrieved from https://www.napa-net.org/news-info/daily-news/will-congress-enact-retirement-legislation-year
  22. Leonard, K. (2017, July 27). What Happens When an Annuity Matures? Retrieved from https://pocketsense.com/happens-annuity-matures-6201107.html
  23. Murray, S. (2018, January 29). Selecting the payout on your annuity. Retrieved from https://www.investopedia.com/articles/retirement/05/071105.asp
  24. Segal, T. (2018, April 2). Are variable annuities subject to required minimum distribution? Retrieved from https://www.investopedia.com/ask/answers/081715/are-variable-annuities-subject-required-minimum-distribution-rmd.asp
  25. IRS. (n.d.). Retirement Plan and IRA Required Minimum Distribution FAQs. Retrieved from https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions
  26. CNN Money. (n.d.). Ultimate guide to retirement. What is an equity-indexed annuity? Retrieved from https://money.cnn.com/retirement/guide/annuities_equityindexed.moneymag/index.htm?iid=EL
  27. Financial Industry Regulatory Authority. (2010, September 13). Equity-Indexed Annuities – A Complex Choice. Retrieved from http://www.finra.org/investors/alerts/equity-indexed-annuities_a-complex-choice
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