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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.
- Long-term security
- Tax-deferred growth
- Principal protection
- Probate-free estate distribution
- Inflation adjustments
- Death benefits for heirs
- 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, the potential for guaranteed lifetime income and the option to leave money to your beneficiaries. Some annuities may also be optimized to help 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.
- Free-Look Period
- Most states require insurance companies to include a free-look period that allows a buyer to cancel the contract without incurring a surrender charge.
- 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.
- 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.
- 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was purchased with money that you've already paid taxes on, then only your earnings will be taxed when the money is withdrawn.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
Annuities come in two basic configurations: 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 AnnuitiesLearn More
Funded with a single lump-sum payment
Guaranteed monthly payouts
Supplement your retirement savings
Income Later Deferred AnnuitiesLearn More
Tax-deferred premium growth
Guaranteed lifetime income that begins on the date you specify
More income later because your money accumulates longer
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 AnnuitiesLearn More
Earns a guaranteed rate of interest for a set period of time
Rate of interest may be guaranteed for a set period of time or may fluctuate from anniversary to anniversary
Backed by the insurance company that issued it
GROWTH POTENTIAL Fixed Indexed AnnuitiesLearn More
Earns interest based on a market index, such as the S&P 500
Doesn't participate directly in the stock market and preserves premium
Guaranteed minimum rate of return
FLEXIBLE INCOME Variable AnnuitiesLearn More
Earns interest through investments you select within the annuity
Does not guarantee a return but offers more growth potential
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.
Tax-Deferred GrowthYou save money without paying taxes on the interest until a later date.
No Contribution LimitsUnlike 401(k)s and IRAs, you set the dollar amount you invest.
Fund Your RetirementAnnuities create predictable income streams for life.
Provide for Your FamilyDeath 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.
- Contact Us
We’ll route you to a financial expert who specializes in annuities and retirement planning.
- 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.
- 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.
27 Cited Research Articles
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