Annuity FAQs

  • What is an annuity?
  • Are fixed annuities safe?
  • What are the different types of annuities?
  • How much would an income annuity pay me?
  • What’s the difference between Qualified and Non-Qualified?
  • Should I use Qualified or Non-Qualified funds to buy your annuity?
  • How is my income taxed?
  • What does “annuitization” mean?
  • What are the payout options for an income annuity?
  • What is a COLA or Cost Of Living Adjustment?
  • What is a “Rate Lock”?
  • What fees are there with a fixed annuity?
  • Can I take money out of my annuity?
  • What are surrender charges?
  • What is a market value adjustment?
  • What's the interest rate on my annuity?
  • What is an annuity?

    An annuity is a contract between you and an insurance company. It’s a type of insurance that can help provide you with a guaranteed income stream in retirement or help you save for retirement.

    Generally you make a premium payment to an insurance company in exchange for a set of financial guarantees from the insurer. There are several different types of annuities available. Annuities are as good as the insurance company that issues the annuity, so make sure you choose a stable insurance company when deciding which annuity to buy.

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  • Is a fixed annuity safe?

    An insurance company's financial security is rated by various ratings agencies such as A.M. Best, Standard and Poor’s, and Moody’s. These rating agencies look at the finances and obligations of insurance companies to determine their financial stability. Each rating agency has their own rating system.

    It’s very important to check your insurance company’s ratings before you decide to purchase an annuity from them. That being said, historically insurance companies have been risk adverse entities that have performed well during times of economic hardship.

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  • What are the types of annuities?

    Generally speaking, there are 5 types of annuities:

    Immediate Annuity – You pay an insurance company a lump sum premium in exchange for immediate monthly income, often guaranteed for life. There are a variety of payout options available, along with cost of living adjustments.

    Deferred Income Annuity – You pay an insurance company a lump sum premium in exchange for monthly income starting at a future date of your choosing. This income is also often guaranteed for life, having a variety of payout options and cost of living adjustments available.

    Multi-Year Guarantee Annuity – The insurance company guarantees to grow your premium payment at a fixed rate for a specific number of years. This type of annuity grows tax-deferred, and is guaranteed by the insurance company.

    Fixed Index Annuity – Your premium grows based on stock market performance. The insurance company limits your potential losses by also limiting your potential for gains. This type of annuity can often be equipped with an “income rider” giving the option for guaranteed lifetime income.

    Variable Annuity – You premium is invested in markets with the associated risks of stock market exposure. Your money is tax-deferred and “income riders” may be available to you. Beware of high fees with this type of annuity.

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  • How much would an income annuity pay me?

    When you buy an income annuity (such as an Immediate Annuity or Deferred Income Annuity), your quotes are based on a few different factors: your age, your premium payment, your payout option, and the current interest rate environment.

    To get your free annuity quote report, check out our advanced annuity calculator.

    When you purchase a lifetime based income annuity, insurance companies use your age to estimate your life-expectancy, so they can get an idea of how many payments they will make to you. Generally speaking, the older you are, the more you will earn on a monthly basis. Age is generally not a consideration for Period Certain Only annuities.

    The payout option also affects the amount of monthly income you will receive. Typically, "Life Only" policies pay the highest lifetime income. That's because there are no guaranteed minimum payment amounts. If you want guaranteed minimum payments included in your policy, insurance companies lower your monthly payments to account for these guarantees.

    The premium amount you intend to use directly affects your payment stream. Your premium payment to the insurance company is the amount of money the insurer has to work with.

    Lastly, the current interest rate environment affects payout rates insurers are offering. Typically, annuity rates follow long-term, highly rated bonds. You can check out the trends in annuity rates here.

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  • What’s the difference between Qualified and Non-Qualified?

    These terms have to do with the tax treatment of your annuity.

    If you buy your annuity with after-tax dollars (e.g. checkings/savings), you are using “non-qualified” funds. If you use pre-tax dollars to fund your annuity, such as an IRA or 401k, you’re using “qualified” funds.

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  • Should you use Qualified or Non-Qualified funds to buy your annuity?

    There are benefits using each type of funding to start your annuity. Carefully consider your options and speak with a tax professional to ensure you’re making the best decision.

    When you use non-qualified money to fund an annuity purchase, your interest is paid to you over the duration of the annuity. This can be a big benefit because it disperses your tax burden. When you run quotes at ImmediateAnnuities.com using non-qualified funds, you’ll see a taxable portion. This tells you how much you have to claim as taxable income each payment period.

    When you use qualified money to purchase your annuity, all of the income you receive from your annuity becomes taxable. However, after the first calendar year you no longer need to include the amount of money in your annuity in your required minimum distribution (RMD) calculations. You can read more about using qualified money to purchase an annuity here.

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  • How is my immediate annuity taxed?

    This depends on the type of annuity you are taking income from as well as the source of funding.

    If your income is coming from a pre-tax retirement vehicle, like a Traditional IRA or 401(k), all of your income is taxable because it has never been taxed before. If your income is coming from a Roth IRA annuity, none of your income is taxable because of its special Roth tax treatment.

    If you used regular post-tax money, it depends on the type of income you are receiving. If your annuity is “annuitized”, as it would be with an immediate or deferred income annuity, each payment consists of return of premium and interest. The interest portion is taxable as income. You can get the taxable portion by running annuity quotes on our site.

    If you are taking distributions from a Multi-Year Guarantee Annuity or a Fixed Index Annuity, your interest is paid out first, so your income is fully taxable at first. Once you’ve received all of your earnings from your distributions, you’ll start receiving your original premium back which is not double taxed. If you get all of your premium back, your income again becomes taxable since you are again earning interest.

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  • What does “annuitization” mean?

    Annuitiziation is the process of irrevocably converting your premium into a guaranteed income stream. You get certain benefits for annuitizing your money.

    One of the biggest benefits is that annuitization disperses your interest over the life of the annuity. This is different from “disbursements” that are available through many annuity products, which pay out interest first.

    Annuitization can be a powerful tool when you have a growth based annuity that has appreciated significant tax-deferred growth. Instead of taking a big tax hit, annuitization can help disperse your tax burden while paying you a guaranteed income stream.

    Contact an annuity expert if you have questions about annuitization.

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  • What are the payout options for an income annuity?

    There are a variety of payout options. Generally, you can buy an annuity that lasts one person’s lifetime, two people’s lifetimes, or a certain period of time.

    If you buy a single life annuity, it is guaranteed to pay however long the annuitant lives. You can purchase single life annuities with guaranteed minimum payments as well. These guarantees can either be a minimum number of years the annuity is guaranteed to pay, or a guaranteed return of premium. These will typically lower your monthly payment amount.

    A joint life annuity guarantees to pay for the lifetime of two people. With a Joint Life Only annuity, once the last survivor has passed, annuity payments stop. Similar to single life annuity, joint life annuities can also have guaranteed minimum payments included; these guarantees typically lower your monthly income.

    Period Certain Only annuities are not based on anyone’s lifetime, but are guaranteed for a fixed period of time only. These annuities typically range from 5 to 30 years, paying back principal and interest throughout the duration of the annuity.

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  • What is a COLA or Cost Of Living Adjustment?

    COLAs or Cost Of Living Adjustments are inflation protection options you can choose to include in your income annuity. There are two types of COLAs, but both will reduce the initial monthly payments you receive from your annuity.

    A flat rate Cost Of Living Adjustment increases your monthly payments by a fixed percentage each contract year, typically between 1% and 5%. You choose what percentage increase you want when you start your annuity, but the higher the percentage increase, the more your initial monthly payments will be decreased.

    A CPI-U adjusted annuity has no guaranteed increases, but instead adjusts according to how the Consumer Price Index for Urban Consumers increases or decreases each year. Fewer companies offer CPI-U adjustments, and whether or not your annuity payments can actually decrease in the event of deflation depends on the insurer’s contractual provisions.

    There are several considerations when you think of purchasing inflation adjustments with your income annuity, so make sure you speak with an annuity expert before deciding on whether or not to purchase one. And it’s a good idea to compare your inflation adjusted quotes against flat rate quotes to see what you’re giving up!

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  • What is a “Rate Lock”?

    When you transfer funds from another financial institution to fund your annuity, many insurance companies offer what is called a Rate Lock. This Rate Lock holds your quoted rate for a period of time, normally somewhere betwen 30 to 60 days, allowing time for the transfer of funds to your new annuity.

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  • What fees are there with a fixed annuity?

    Our insurance agency doesn’t charge any fees whatsoever to you. We are paid by receiving a commission from the insurance company. You can read more about commissions here.

    With most traditional fixed annuities, the insurance company does not charge any fees for their products. That means there are no fees for Immediate Annuities, Deferred Income Annuities, and most Multi-Year Guarantee Annuities.

    The types of annuities that typically have fees are Fixed Index Annuities, and to a much greater degree Variable Annuities. With these types of annuities, make sure you ask if there are any fees before your sign up for your annuity!

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  • Can I take money out of my annuity?

    This depends on the type of annuity that you choose.

    If you get an income annuity, your money is typically not liquid and won’t be available to you in the case of emergencies. If there are provisions providing for emergency situations within your income annuity contract, they are typically expensive to your disadvantage in the long run.

    With multi-year guarantee annuities and fixed index annuities, you typically have limited liquidity as allowed in your annuity contract. This liquidity varies by company and contract, but there is typically a percentage you can take out each year. Some companies have riders with fees charged for the right to make these withdrawals, so make sure you speak with an annuity expert before your start your annuity.

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  • What are surrender charges?

    Surrender charges apply when you take more than the allowable amount out of your annuity. With most contracts there is a surrender charge schedule that outlines what the percentage penalties are in each contract year. Remember, there can also be a Market Value Adjustment applied to withdrawals in excess of the allowable amount.

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  • What is a market value adjustment (MVA)?

    Some annuities have a market value adjustment (MVA) assessed if you withdraw more than the allowable amount.

    Essentially, a market value adjustment compares current interest rates against the interest rate at the time you started your annuity. If rates have gone up, your annuity rate is worth less and you will be penalized for that. But, if rates have gone down, your annuity is worth even more and you will benefit from the MVA. Some insurance companies cap the amount you can lose or benefit through a MVA.

    If you do not withdraw more than the allowable amount, you will not be assessed for a MVA.

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  • What's the interest rate on my annuity?

    This depends on the type of annuity that you get.

    If you have an income based annuity, such as an immediate annuity or a deferred income annuity, most insurance companies do not publish an interest rate. They only give you the income amount.

    Most income annuities are lifetime income annuities. The reason insurance companies do not publish your interest rate is that your returns depend on how long you live. If you live a long time, you will make more money and earn more interest. But, if you don't live a long life and your annuity does not guarantee returns above your original premium, you could lose money. This would effectively result in a negative interest rate. So with an income annuity, your interest rate frequently depends on how long you live.

    If you buy a Multi-Year Guarantee Annuity, you should know the interest rate of your annuity before you apply. These annuities have a guaranteed interest rate for the term. Our website publishes a full list of MYGA rates so you know exactly what you will be getting.

    If you purchase a Fixed Index Annuity, your interest rate is not guaranteed. It depends how the index or indicies you are tracking perform. To this extent, your returns are affected by the stock market. But, your cap and floor rates ensure you won't lose money by limited your potential for returns. A Fixed Index Annuity quote will normally show you guaranteed values and hypothetical values based on the past performance of your chosen index. Just remember that past performance is no guarantee of future performance.

    Lastly, Variable Annuities typically do not guarantee any growth. Your money is invested in the financial market, meaning you can make or lose money according how your securities perform.

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