FYI About Annuities

Written by Hersh Stern Updated Monday, May 6, 2024

FYI About Annuities

An annuity offers a number of financial benefits, including lifetime income, reduced market risk and the ability to leave a legacy. However, with so many options available, choosing the product that best matches your specific financial needs and goals can seem overwhelming. In this article we endeavor to review the basics about annuities so you can make a more informed buying decision.

What is an Annuity?

An annuity is a financial contract offered by a life insurance company. The premium you pay to the company to buy your annuity grows on a tax-deferred basis and can either be withdrawn at your discretion or can be turned into a guaranteed income stream. Each type of annuity offers different features and benefits worth consideration.

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Multiyear Deferred Annuities (sometimes called "Fixed Annuities")

A multiyear deferred annuity offers you a stated interest rate over the duration of the contract, guaranteed by the underlying insurance company. The ‘deferred’ portion of the annuity means that you can pay premium into the contract and defer withdrawals of either interest or principal to a later date. As long as the earnings are deferred (i.e., not withdrawn) they grow on a tax-deferred basis. Your deferred annuity may be annuitized or converted into an immediate annuity at a date chosen by you in retirement.

Fixed Indexed Annuities

Fixed indexed annuities offer growth potential based upon the underlying benchmark index’s (e.g., S&P 500, Nasdaq) performance. In most cases, the insurance company will offer you a range of possible performance outcomes, including a minimum interest rate and rate cap. The minimum represents the least amount of interest that will be credited to your account over the period and the rate cap represents the greatest amount of performance to be credited.

Some of the primary benefits offered by fixed indexed annuities include:

  • Tax deferred growth on the premium dollars invested.
  • Flexible annual withdrawals.
  • Optional death benefit riders offering cash value options to named beneficiaries for an added annual fee.

Immediate Annuities

An immediate annuity converts your premium into an income stream today. The income stream offered will be calculated considering your current age, your life expectancy, prevailing interest rates and the amount of premium you pay. The income stream you receive can be set up to pay for a specified period of time or for the duration of your (and your spouse's) lifetime(s). The income stream is guaranteed by the financial strength of the underlying insurance company.

What You Should Consider Before You Buy an Annuity

If you have decided to consider an annuity as part of your investment portfolio, consider the following questions as you gather and compare quotes:

  • What are my primary financial goals and objectives and how will an annuity help me to accomplish them?
  • Is it possible that I will need to access any or all of the premiums after I deposit them into my contract?
  • Does the annuity contract offer a minimum crediting interest rate? If so, what is the current rate being offered?
  • What fees and charges will be paid to the insurance company?
  • What surrender fees will be applied and over what time frame to funds withdrawn?
  • What optional riders are offered by the contract?

Each of the annuity types mentioned above offer different features and benefits worth consideration. Before placing premium into an annuity contract, be sure to carefully consider products that best meet your specific needs and objectives.



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