Annuities

With a Fixed Annuity, your insurance company will provide a fixed amount of periodic payments and a minimum rate of interest, typically higher than a CD or bond. You can either defer income or you can immediately draw income. They’re one of the less popular annuities because there is no upside than the stated interest payment.

In order to deliver your return, the life insurance company invests money in low-risk vehicles like highly rated corporate bonds and U.S. Treasury securities. They’re safe and predictable and can be a good fit if you have a low tolerance for risk and don’t mind receiving modest returns.

Fixed Annuities are regulated by state insurance departments.

Not all annuities guarantee a fixed rate of return. With a Variable Annuity, you can direct your payments to different subaccounts, similar to mutual funds. Some companies offer blended portfolios, while others offer 30-100 individual investment options and free movement between those options. You choose where your premiums are placed, and thus the overall returns on your annuity.

Variable Annuities are the most popular form of annuities partly because of the opportunity for higher returns as compared to a Fixed Annuity. Your payout will vary depending on how much you put in, the performance of these subaccounts, and management fees.

Another great benefit is the guaranteed flow of income for your lifetime or up to 20 years, whichever is longer — this becomes a great tool for income planning for you and your next generation. Since all proceeds grow tax-deferred, Variable Annuities can be used for Estate Planning for future generations of tax-deferred income.

Variable Annuities also lock in your initial deposit as the minimum amount that your account will be worth using one of their Riders. Some Riders offer a minimum guarantee that your account will increase every year, should this money be used for a future payout. In a bear market, these Lock-In Riders may be the difference between losing money in a brokerage account and receiving a minimum guaranteed amount for future payouts!

The insurance company doesn’t guarantee Variable Annuity rates, so as the annuitant, you bear the investment risk. The upside is that you have a lot of control—you can participate in the stock market and still enjoy the tax-deferred, insurance, and lifetime income benefits of annuities.

Variable Annuities are regulated by the SEC.

A Fixed-Indexed Annuity (FIA) offers the opportunity for tax-deferred growth that’s based partially on changes in a market index, plus the option to convert your annuity into a guaranteed retirement income stream.

It’s important to clarify that your crediting strategy tracks the stock market, but your money is never actually in the stock market. Rather than directly investing in the equity or bond markets, you can invest in one of the several Indexes. Most of them have a minimum floor that you can lose–often no more than 0 percent for the period of point-to-point, which refers to the date of your contract and one year from this date.

FIAs can use many different and blended Indexes. In a bull market, FIAs can underperform a Variable Annuity. In a bear market, FIAs can outperform Variable Annuities because of their floors.

FIAs are a good option if you want the opportunity to earn indexed interest while protecting your principal from market losses. They combine the low-risk nature of a Fixed Annuity with the potential capped returns of a Variable Annuity.

As its name implies, an Immediate Annuity is structured to begin paying income almost immediately upon deposit of a lump sum.

The insurance company begins paying you an income one annuity period after purchase, which can be 30 days to one year. Because payments begin so soon, Immediate Annuities are popular among retirees.

After paying the initial premium, you can receive regular income, which can be deferred up to one year. The remaining funds accumulate on a tax-deferred basis.

Deferred Annuities don’t begin paying out immediately after your initial investment. Instead, you can specify the age at which you’d like to begin receiving annuity payments. Your payout period can be years or decades into the future. That’s why they’re great supplements to 401(k)s and IRAs.

In the accumulation phase, your account grows tax-deferred.

After your final premium has been paid, your account has reached the distribution phase, and it begins making regular payments to you.

One of the best benefits is that most Deferred Annuities have no IRS contribution limits. Your premiums grow tax-deferred inside the annuity. The earnings credited to your contract are taxed when they’re withdrawn.

You can transfer other retirement accounts into your IRA so all your retirement savings are in one account. With all your retirement accounts in one place, your overall retirement situation will be easier to assess and adjust. It’ll be easier to determine whether your assets are properly diversified or if they should be reallocated at any given time.