What Are Annuities?

Annuities Overview An annuity is a contract between a policyholder and an insurance company. You can either make premium payments as a one-time lump sum or as a series of payments over time.

In exchange, the insurer provides certain contractual guarantees.

These guarantees cover a variety of contract components, including:
• Income
• Interest rates
• Withdrawals
The purpose of an annuity is to provide an annuitant with a steady retirement income stream. Except for immediate annuities, most annuities allow for tax-deferred money growth until they’re withdrawn.

The video below provides an overview of Annuities.

There are five types of annuities

Before you make a purchase, it’s important to know the different annuity types, how they vary, and how each one could benefit you.
• Immediate annuities (SPIAs)
• Multi-year guarantee annuities (MYGAs)
• Fixed annuities
• Fixed index annuities
• Variable annuities

Immediate vs. Deferred: With an Immediate Annuity, you make a premium payment (usually a one-time lump sum), and in exchange you begin receiving income soon thereafter. This type of annuity guarantees a fixed income for a specified period of time or for the rest of your life, but you do not have the option to invest or spend your money in another way so an immediate annuity isn’t for everyone. 1

Income payments begin no later than 12 months after the initial premium payment. All other types of annuities are deferred annuities, which start income payments many years after the initial premium payment. 1

Other ways annuities can differ is if they are fixed or variable annuities, or the difference in a contract of how interest credits are calculated and given.

Single, Flexible, or Scheduled Premiums: Single premiums require only one payment for a single premium annuity, while you can make a series of payments into a flexible premium annuity. In a flexible premium contract, you pay as much premium as you want, whenever you want, within set limits. For a scheduled premium annuity, the contract spells out your payments and how often you must make them.

Fixed Annuities:
Fixed annuities are insurance contracts which enable growth at a fixed, guaranteed interest rate. Once the initial growth period has passed, the insurer may change the guaranteed rate. Fixed index annuities earn interest or provide benefits linked to the performance of an equity index. Examples of indices are the S&P 500®, the NASDAQ®, or the Dow Jones Industrial®. Fixed index annuities do not directly participate in any financial markets, and can provide a conservative solution with reasonable growth potential.

The video below can help you understand more about fixed index annuities.

A multi-year guarantee annuity is a fixed rate annuity in which you pay the insurance company a specified amount of money, often a single-premium payment or lump sum. The insurer guarantees a defined rate of compound interest over a certain period of many years. This period is known as the annuity’s surrender period, the duration of which you can’t make a withdrawal without penalty. Some policies allow you to withdraw up to 10% of your account value after the first year without penalty.

Variable Annuities:

During the accumulation period, the insurance company puts your variable annuity premiums into a separate account (this is technically a separate value). You decide how the company will allocate those premiums, depending on how much risk you want to take with your investments. You may put your premium into stocks, bonds, or other accounts, with no guarantees, or into a fixed account, with a minimum guaranteed interest rate. If you go the "investment route," take heed because the potential for interest credit rides on the performance of the investments in which your money is allocated. As a result, your principal and interest credit are subject to market risk. This can have positive or negative results depending on the performance of your investment choices. 5

The video below can help you understand more about variable annuities.

Guaranteed Lifetime Income Rider

A guaranteed lifetime income stream can bring financial security, freedom, and peace of mind by guaranteeing income until death. Income riders may be an effective vehicle for lasting financial security because they guarantee that you won’t outlive your income. When paired with the right annuity, an income rider can provide a steady income stream for the rest of your life which may be purchased as a complement to an annuity contract. The income rider is issued along with a base contract. The guaranteed lifetime income payments will continue until the death of the annuity owner.5

If the owner dies before the policy’s accumulation value is depleted, there are two options:
• The spouse can continue to receive the Guaranteed Withdrawal Payments until the policy’s accumulation value is depleted.
• The spouse or beneficiary can receive any remaining accumulation value in a lump sum or in a series of payments.

The video below can show you more about guaranteed lifetime income riders.

Planning for Inflation:

A 2016 LIMRA study found that when inflation reaches 3 percent, retirees may see their purchasing power erode by more than $117,000 over a 20-year period. Cost-of-Living Adjustment, or COLA, riders can be contractually added to some annuity policies at the time of application. You can choose the percentage you want the income to increase by on an annual basis, and for the life of the policy. An Inflation Protected Annuity (IPA) is similar to a regular immediate annuity, but its payments are indexed to the rate of inflation. However, oftentimes there is a cap, and investors do not receive payments beyond this percentage. Another way to address future price increases is to have contractual income streams starting at different times. Just like you can ladder CDs or bonds with different maturities, you can also ladder lifetime income.3

Annuities Can Lend Safety And Stability

Choosing The Right Annuity

All annuities are different. Any annuity you choose should be well-suited to your financial situation, goals, and needs. It’s important to understand all the pros and cons before purchasing an annuity.

Fixed vs. Variable: Unlike variable annuities, fixed index annuities offer principal protection, and you can capitalize on tax-deferred dollar growth.

The calculator below can help you get a feeling for some of the tax advantages of a fixed annuity.

Questions to Consider as you Review Your Annuity Options:

• Is this a single premium or is this a flexible premium contract? In other words, does the contract involve a one-time lump-sum payment, or a series of multiple payments?
• Is this a scheduled premium annuity contract or is this a flexible premium annuity contract? What are the terms?
• What is the initial interest rate and how long is that interest rate guaranteed?
• Does the initial interest rate include a bonus rate, and if so, how much is the bonus?
• What is the guaranteed minimum interest rate?
• What renewal rate is the company crediting on annuity contracts of the same type that were issued last year?
• Are there withdrawals or surrender charges or penalties if I want to end my contract early and take out all of my money? If so, how much are the penalties and charges?
• Can I get a partial withdrawal without paying surrender charges for reasons such as death, confinement in a nursing home or terminal illness?
• Is there a market value adjustment (MVA) provision in my annuity?
• What other charges, if any, may be deducted from my premium or contract value?
• If I pick a shorter or longer payout period or surrender the annuity, will the accumulated value or the way interest is credited change?
• Is there a death benefit (for estate planning purposes)? If so, how is the death benefit set and can it change?
• What income payment options are available? Once I choose one payment option, can it be changed?


1 - thebalance.com/immediate-annuity-basics-what-to-know-before-you-buy-2389023

2 - thebalance.com/questions-to-ask-about-annuity-2389039

3 - forbes.com/sites/steveparrish/2019/06/17/taming-the-inflation-risk-in-annuity-payouts

4 - thebalance.com/what-are-guaranteed-withdrawal-benefits

5 - money.cnn.com/retirement/guide/annuities_variable.moneymag/index.htm

Additional Resources:

How Annuities Can Lend Safety and Stability to Your Retirement Plan
Fixed Indexed Annuities
Market Volatility Can Be Defeated - Retain or Gain
Get a Paycheck for Life With the Guaranteed Lifetime Income Rider
Understanding Variable Annuities Pros and Cons
Managing Your Annuity
Variable Annuity Fee Quick Reference Guide