Annuity Information

Is an annuity right for me?
When it comes to retirement assets, many people hear the word “annuity” and don’t know what is being discussed. If you’re one of these people left wondering, “What is an annuity?” you can relax. Annuities are actually easy to understand, especially when you can get some clear answers to your most basic questions.

The definition of “annuity”
An annuity is a financial contract between you and an insurance company. You purchase an annuity with a certain amount of money called a “premium;” in return, they agree to provide you with a stream of income in retirement, with benefits depending on the contractual terms.

It can be helpful to think of other types of financial vehicles to contrast annuities. For instance, a Certificate of Deposit (CD) is a savings vehicle with a contract between you and a bank. Contracts can carry different terms and benefits, as well as maturity dates. However, where a CD is backed by some Federal Government guarantees, an annuity is backed by guarantees from the insurance company who issues it.

The purpose of an annuity
Beyond the basic definition offered above, it will help you answer the question, “What is an annuity?” if you think about it in terms of its purpose. The purpose of an annuity is to turn monetary assets like savings into an income stream, whether you need income immediately or beginning in the future.

Under the umbrella of that broad purpose, each type of annuity provides income in different ways, and so has its own specific purpose. An immediate annuity can act like your own “personal pension” because you purchase the annuity with one lump sum of money in exchange for income over a specified period of time, or the rest of your life, depending on the terms of the contract. You can find annuities that provide the income you need for as long as you need it.

A deferred annuity has a purpose. You can contract for a fixed rate of income by agreeing to allowing your premium to grow for a fixed period of time before starting an income stream. With a deferred annuity your premium amount will grow tax-advantaged, because you don’t pay taxes until you start withdrawing.

A fixed annuity provides a guaranteed* rate of interest on your premium for a specified period of time, sometimes until you start withdrawing income. Most annuities have a surrender period for the first five to 15 years of ownership; early withdrawal will deplete your principal by the amount of surrender charge still in force. Bonus annuities may carry higher fees and charges than annuities without the bonus feature, and may not pay the bonus in case of early withdrawal.

A variable annuity is a savings vehicle with an investment feature. Earnings are also tax deferred, and your principal is exposed directly to stock market risk. This means you can trade within your variable annuity and gain when the market rises, and you can also lose not only earnings, but principal, when the market falls.

An indexed annuity has characteristics of both the fixed and variable annuities. There is a guaranteed interest rate and protection of principal of the fixed annuity, along with the potential to participate in market gains without exposing your principal to market risk. Some of the features that are available in fixed index annuities are bonuses, various crediting methods, and allocation options that give you choices for your money.

Choose your annuity
Each of these annuities, depending on your particular situation can be right for you. Now that you have a better understanding what an annuity is, you can evaluate your circumstances and choose the one best suited for your purchase. If you aren’t sure which one is for you, don’t hesitate to sign up now for the Senior Annuity Alert newsletter.