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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-sheltered 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, 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.
- Free-Look Period
- Most annuities 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was purchased with money that you've already paid taxes on, then only your earnings will be taxed when the money is withdrawn.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
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.
Funded with a single lump-sum paymentLearn More
Guaranteed monthly payouts
Supplement your retirement savings
Guaranteed lifetime income that begins on the date you specifyLearn More
More income later because your money accumulates longer
Tax-deferred premium growth
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.
Earns a guaranteed rate of interest for a set period of timeLearn More
Backed by the insurance company that issued it
Earns interest based on a market index, such as the S&P 500Learn More
Guaranteed minimum rate of return
Earns interest through investments you select within the annuityLearn More
Does not guarantee a return but offers more growth potential
Learn about the different types of annuities and find out which one is right for you.
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
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We’ll route you to a financial expert who specializes in annuities and retirement planning.
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Work with our trusted financial planners to find an annuity that meets your financial needs.
27 Cited Research Articles
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