Understanding Annuities

Annuities may seem complicated, and at times, they can be. Here, we will answer your questions in straightforward, easy to understand language, so that you have a better understanding of what annuities are and how they can secure you income for life. 


Frequently Asked Questions

Types of Annuities

What is a fixed annuity?

A fixed annuity is designed to grow funds over time through interest rather than generating income from investing in shares. Fixed annuities provide a guaranteed interest rate on your investment for a fixed amount of time, such as 10 years. After the allotted time has passed, you will be advised of what the new interest rate on your investment will be. When this happens, you can decide if you want to keep your annuity at the new interest rate, exchange it for a different type of annuity, or cash it in.


What is a fixed index annuity?

Fixed index annuities are also known as indexed annuities. Fixed index annuities are often rather complex and feature different rates & formulas for calculating investment returns, so it is very important to compare different features for different plans. With an indexed annuity, you’re guaranteed a minimum return on your annuity, but you also have the potential to earn additional income by a formula tied to the stock market. They feature the guaranteed stability of a fixed annuity and have a lower financial risk than a variable annuity.


What is an immediate annuity?

Immediate annuities guarantee payments very quickly after your investment. When you decide to invest in an immediate annuity, you would pay the insurance company a lump sum, and they would pay you a guaranteed amount of income almost immediately. You can choose to have the payments made to you monthly, quarterly, annually, or all at once.

What is a variable annuity?

Variable annuities are designed to outpace inflation and increase long-term capital growth by placing your annuity investment into shares. While they offer the greatest possibility for generating income, they also have the highest financial risk of the annuity types. Variable annuities allow you to choose from a selection of investments and then pays you based on the performance of your investment choices. Variable annuities are exempt from the probate process, and still guarantee a minimum income.


What are some warning signs of a bad annuity?

There are several fees and charges that you can review & compare. These include the expense risk, administration charges, rider fees, surrender charges, and underlying fund expenses. If the fees built into your annuity contract are too high, it completely offsets the benefits you receive from the earned annuity interest being tax-deferred. Another thing to be aware of is the general reputation of the insurance company from which you’ve obtained the annuity. Since annuities are guaranteed by the insurance company and not the government, you’ll want to make sure you invest with a reputable agency.

The good news is that if you do find yourself in a bad annuity, there is a “free look” period in which you can get your investment back, no questions asked. The length of the free look period varies state by state, but ranges from 10 to 30 days.

What types of guarantees can I buy with my annuity?

You can attach various benefit and protection guarantees to your annuity. These are called contract riders and are broken down into two categories: living riders and death benefit riders. Living riders can enhance your income, and death benefit riders can enhance your legacy. There are many different riders available, and each have their own stipulations, benefits, and fees. They can be custom-tailored to suit your needs and written into your annuity contract.


What are the risks associated with annuities?

Each type of annuity has its pros and cons, and since annuities are custom-tailored to the individual, risks can vary from annuity to annuity. In general, however, variable annuities typically have the highest investment risk since their performance is based off of mutual fund-like stock portfolios. Following this would be fixed index annuities, since the interest rate for them is based off of different formulas tied to the stock market, and the safest investment risk is a fixed annuity, which is not affected by the stock market in any way.

Another risk associated with annuities is that since annuities are guaranteed by the insurance agency they come from and not the government, you will want to make sure that you are investing with a reliable company. Annuity Connect can partner you with a reputable advisor to find out more about annuities and why they’re right for you.

Benefit Questions

Do annuities provide for spouses?

Annuities can provide for your spouse or heirs if you pass. You can decide who would inherit your money, and it is written into the annuity contract. If your annuity already began disbursing before your death, then your beneficiary will receive the remaining payments either as monthly payments over five years, minimum payments stretched over their life expectancy, or as a lump-sum, depending on the contract. If it hasn’t, then your beneficiary can take over the annuity into his or her name.

What is an enhanced death benefit?

An enhanced death benefit is a rider on a variable annuity. It offers annual or monthly “step-ups” in which the insurance company reviews your account value, and the highest recorded value becomes the death benefit when you die, even if your investment portfolio is doing poorly. This allows you to provide market gains to your heirs.

How often will I get money from my annuity?

You can choose to receive your payments monthly, quarterly, annually, or as a lump sum payment. All interest grows tax-deferred and money only counts as taxable income once it is disbursed to you.


How does income for life work?

Income for life guarantees that no matter what, you will receive a source of income until your death. Regardless of how the stock market is doing, if the government changes the laws on pensions, or if you haven’t saved enough before retirement, you are insured to receive income for the rest of your life.

General Questions

Are there penalties for taking out money?

Like bank CDs, IRAs, and 401(k)s, deferred annuities have surrender charges if you withdraw your money early. The period can vary depending on the annuity agreement, and the corresponding charges typically decline with time. Funds withdrawn from an annuity become taxable income, as well.


Is guaranteed income exclusively for retirees?

It’s not uncommon for grandparents to name their grandchildren as a joint annuitants or beneficiaries, and the result is that the grandchild will receive a sum of money for life after the grandparent passes. This can ensure that the grandchild, even if they’re a minor, will always have a guaranteed income. This is just one example of how guaranteed income can benefit and enhance your legacy.

How do I pay for an annuity?

Depending on the type of annuity you choose, you can pay for it in one lump sum or make a series of payments over time. Many people choose to roll over their IRA, 401(k), 403(b), or lump sum pension payment into an annuity tax-free.

Who should get annuities?

Whether you are a young professional, approaching retirement age, or already retired, there are many ways that an annuity could benefit you. If you want the security of a stream of income you can’t outlive, want to provide for your spouse or heirs as part of your legacy, or want the comfort of having an additional asset you can depend on during retirement, you should consider an annuity.


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