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Annuity Basics

What Is an Annuity?
An annuity is a financial contract between an insurance company and a buyer — typically an investor or retiree. In exchange for a lump sum or monthly payments toward the principal, an insurance company will pay out income through a series of payments or a one-time lump sum. An annuity is meant to provide a guaranteed stream of income through a set period of time or until an annuitant’s — or an annuity owner’s — death. Annuity savings are tax-deferred and can accumulate interest over time.
What Does It Mean to Be Tax-deferred?
Annuities have a tax-deferred status, meaning that while interest accrues on the savings, they are not taxed until withdrawn. This status helps to increase the amount of earnings in an annuity account.
What Happens to My Annuity When I Die?
A unique benefit to an annuity is the death benefit. Should an annuity owner die before their annuity disburses all payments, the remaining assets can transfer to a spouse or surviving beneficiary. If you choose not to have a beneficiary, upon your death all remaining annuity assets will be surrendered to the issuing insurance company.
Interested in Buying an Annuity?
Learn about the different types of annuities and find out which one is right for you.

Buying an Annuity

Who’s the Best Candidate for Buying an Annuity?
Annuities benefit individuals in their 50s and 60s the most, since they are closer to retirement and looking to save additional income toward their nest egg. While it is okay to invest in this financial product at a younger age, annuities may not be as profitable as investing in mutual funds or bonds. Young investors have a stronger risk tolerance and more opportunity to invest in products with a higher rate of return.
Why Invest in an Annuity vs. a Mutual Fund?
You should take the following into account when deciding between an annuity and mutual fund. Mutual funds follow the market conditions. While they may offer a higher rate of return if conditions are positive, they also carry higher risk of losing income and interest. Annuities, however, guarantee a steady, low-risk stream of income no matter the market conditions. They also have the ability to grow tax-deferred over time.
What’s the Difference Between Immediate and Deferred Annuities?
An immediate annuity contract disburses a stream of income payments immediately after the initial purchase. Deferred annuities also guarantee a payout stream, but will disburse at a later time.

Taxes & Fees

Are There Any Fees Associated With Purchasing an Annuity?
Different annuity types charge different sets of fees to invest. However, some of the most common fees include:

• Mortality and expense (M&E) fees to support insurance guarantees and selling expenses of the annuity contract.

• Administrative fees to maintain the annuity contract.

• Potential surrender charges to help avoid premature withdrawals. Often times these surrender charges can be expensive, but they would be spelled out in the contract.

• Investment management fees, specifically for variable annuity options. Rider fees.
Will a Beneficiary Have to Pay Taxes on the Annuity?
Yes, annuity payments disbursed to a spouse or beneficiary will be treated as taxable income.
How Soon Can I Withdraw From My Annuity Savings?
Annuity owners can begin withdrawing money from their annuity by the age of 59½ without having to pay an early withdrawal fee. Some annuity contracts offer a surrender period, or an amount of time an investor has to wait before withdrawing funds from their annuity account. If money is withdrawn before that time, you will be subject to paying a surrender charge.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: February 5, 2021

3 Cited Research Articles

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  1. Annuity FAQ. (n.d.). Retrieved from http://www.retirementegg.com/pages/annuities/annuity-faq.php
  2. CNN Money. (n.d.). What are the different types of annuities? Retrieved from https://money.cnn.com/retirement/guide/annuities_basics.moneymag/index2.htm?iid=EL
  3. Williger, M. J. (2004, April 7). FAQ-Annuities. Retrieved from https://www.elderlawanswers.com/