There is a lot to annuities. They come in many different flavors! Just like a box of assorted candies. When shopping for an annuity, it’s good to have a basic understanding of what they are and what they can do for you.

Let’s Dive in

Annuities are contracts with insurance companies. They are purchased to offer the owner certain guarantees and assurances. Some annuities can be thought of as a kind of purchased pension plan. Others can be used for guaranteed growth for a period of time.

Annuities are defined in three ways:

1. How they are purchased; Either a fixed-rate or a variable rate.
2. How they are purchased; Either a single or multiple payments.
3. When the distribution starts; Either Immediately or at some future date.

Annuities can either be qualified or non-qualified. Most qualified annuities are purchased with pre-taxed dollars can be transferred from plans like an IRA, 401K, or pension plans.  

Types of annuities

A variable annuity is a part insurance product and part securities investment. With a variable annuity, the owner assumes all of the risk, not the insurance company. Variable annuities are risky and are exposed to market risk. In addition, they are loaded with fees. For more about these fees, check out our article HERE on costs that are associated with these types of annuities.  

Fixed annuities have guarantees and are completely safe for the investor. They have a guaranteed interest rate of growth based on the contract for a certain number of years. These are very similar to bank CDs. You may often hear the acronym for this annuity as MYGA; Mutilple Year Guaranteed Annuity. 

Fixed Index Annuities (FIA’s), have been the most popular annuity over the past decade. Their growth is based on how certain indexes perform, such as the S & P 500 index. They are usually limited in growth by cap rates or participation rates. They are not considered an investment because of the vehicle that is used for growth, the index. Most of these annuities are guaranteed never to lose principal unless the contract is forfeited. Another great advantage of this type of annuity is called a Lifetime Income Benefit Rider (LIBR). The LIBR allows the annuitant to take lifetime income without actually annuitizing, or giving up control of the contract. 

Immediate Annuities have also been referred to as income annuities or Single Premium Income Annuities (SPIA’s). These annuities usually start payments within the first year of the purchase. This can be like a guaranteed pension plan to add to your retirement funds. 

Deferred annuities allow the purchaser to delay the income for a period of time in the future at least a year after the date of purchase. The period while the annuity is ‘in waiting’ is called the accumulation phase. 

The biggest attraction to annuities is generally the tax-deferred growth and the contractual guarantees, especially with fixed annuities. Fixed annuities provide safety and guarantees from loss of principal. Annuities are guaranteed by the financial strength of the insurance company from which it was purchased.  

Advantages of buying annuities

There are several advantages to buying annuities. These are some of the top advantages; the list goes on and on.

Advantage 1 – Tax Advantages- A great thing about annuities is that they frow taxed deferred. Any gains on your investment will grow tax-free until you start to make withdraws.  

Advantage 2 – Guaranteed Lifetime Income – The second advantage of purchasing an annuity is the guarantees of a lifetime income that you can’t outlive, no matter how long that may be.   

Advantage 3 – Contract provisions. Several annuities and insurance companies have decided to add additional benefits such as Long Term Care riders in the event that you may need such a service.  

Advantage 4 – Probate Free – When an annuity is inherited, it doesn’t need to go through probate, saving the family an incredible amount of hassle.

Advantage 5 – Contributions – There is no limit to the number of annuities that you can purchase. Several people purchase up to 10 or 11, depending on the goals that they are trying to achieve. Accounts such as IRA’s and 401K’s have limits for contributions. 

How do I know which kind of Annuity to Purchase

Which annuity you decide to purchase will depends on the goals that you are trying to achieve. Here are some questions that you can consider.

1. Will you need income in your lifetime, or do you want to pass it down to your inheritance for a legacy benefit?  
2. Will you need income immediately, or will you need it sometime down the road. This could be an immediate annuity or a deferred income annuity. You could also purchase the most popular annuity right now, the Fixed Index Annuity with a guaranteed income rider.
3. Do you have qualified funds and want guaranteed growth? Then a Multi-year Guaranteed annuity may be what you are looking for. Perhaps you want to participate in the index with a Fixed Indexed Annuity. 

How do I purchase an annuity?

Before you purchase an annuity, it is best to know your finances and your goals. Write down your objectives and be sure to contact a representative who is an annuity expert to make sure you are looking into the correct product for your unique situation. 

Step 1 – Review your finances and consult with an annuity expert.

Step 2 – Look at the annuities above and get a basic understanding of the type you are looking to purchase.

Step 3- Research, the annuity provider. Your annuity specialist can help you with this. He can look up the ratings for different carriers.  

Step 4 – You will need to complete an application. Rates change, so the sooner you think you want an annuity, the better it is to get started right away.

Step 5 – The money will be transferred from your retirement account, or in some cases, you will write the insurance company a check.

Step 6 – After you have purchased your annuity, you have a free-look period that can last from 10-30 days. Be sure to look at your contract for these details. During that time, you can change your mind without any penalty. 

Here at Annuity Pal, we can help with those tough decisions or questions that you may have about annuities. Give us a call; we are here to help.