An annuity is an investment product issued by an insurance company that provides you with guaranteed periodic payments in return for your initial investment. The simplest way to think of annuities is as a loan you’re making to the life insurance company. You give them a large lump sum of money and they pay you back over time in installments with interest.
Our vast network of independent insurance agents can provide you with a large selection of annuity products that will provide you with a guaranteed future income that is immune to market fluctuations and economic downturns.
Annuities offer many options, but in their simplest form there are only three things you need to decide:
- How much you want to invest
- The size of the payments you want to receive
- The length of time you want to receive them
If you change any of these three things, it will affect the others. If you choose higher payments with the same investment amount, the annuity will pay for a shorter period. Or if you elect to receive payments for a longer period, the payments will be lower. You choose these options when you purchase the annuity.
How Does an Annuity Work?
You purchase an annuity by paying a single lump sum, or in some cases, by making periodic payments over time, such as through payroll withholding. The insurance company then invests your payment so the annuity earns interest. Depending on the type of annuity you choose, that interest may or may not change the payments you receive or the length of time the annuity pays.
Why Would I Buy an Annuity?
You buy an annuity because you want a predictable, guaranteed source of income in the future that isn’t subject to market fluctuations.
The primary advantage annuities have over other investments such as stocks, bonds, and mutual funds is the predictability and guaranteed income they provide. With a simple annuity, the only way your payments will ever go down or stop early is if the issuing company were to become completely insolvent.
Who Buys Annuities?
Annuities are typically purchased by retirees and those planning for retirement. They’re also sometimes purchased by people who come into a sudden windfall, such as winning the lottery or receiving a large legal settlement, and by people when making wills.
You probably wouldn’t want to leave children a large sum of money with no restrictions, so an annuity would provide a good way to give them a safe, guaranteed income for many years.
What Are the Different Kinds of Annuities?
Annuities can be structured with many different options, but in general there are only four main types of annuities:
- Immediate annuities are the simplest of all. These annuities begin payments immediately after deposit of the lump sum.
- Deferred annuities are the opposite of immediate annuities. They begin payments at some future time that you select, such as at a certain age.
- Fixed annuities are annuities that pay a fixed amount for the life of the annuity regardless of how well the annuity’s investments perform.
- Variable annuities are annuities that can make higher or lower payments depending on how well the annuity’s investments perform. This is the only type of annuity where loss of principal is possible; however, options can be added to protect you from losses.
Are Annuities Better Than Stocks and Mutual Funds? How about Bonds?
Annuities are neither better nor worse than stocks, bonds and mutual funds; they serve different roles.
Annuities provide a safe, predictable future income. They aren’t usually purchased with the expectation that they will gain value like stocks and mutual funds are. They are somewhat similar to bonds, but bonds can be traded on the open market at any time while annuities cannot.
What If I Die Before I Receive All the Payments?
Many annuities offer optional riders that provide a death benefit that allows a spouse to continue receiving payments if the owner dies, or even to accelerate payments if the owner is diagnosed with a terminal illness. This is something you should carefully consider and discuss with your insurance agent when buying an annuity.
Can I Cash Out Early?
Yes, but it may cost you. Deposits in an annuity are locked up for a period known as the surrender period, during which you would pay a penalty if you touched the principal. The surrender period can last from two to more than 10 years. Surrender penalties start at 10% or more and typically decline over the surrender period.
Who Sells and Regulates Annuities?
Annuities are sold by insurance companies and investment firms. Insurance agents and investment brokers need to hold a state life insurance license to sell annuities, and also a securities license in order to sell variable annuities. Annuities are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Why Choose an Independent Insurance Agent?
Independent insurance agents simplify the process of shopping for and comparing annuities. They will explain the complex terms for you, cut through the jargon, and make sure you understand the fine print.
But perhaps most importantly, they work for you – not one insurance company. They can compare annuity products from many companies and pick the ones that are best for you at the best possible price.
They’ll also be there for you in the future if your needs change or questions arise. They work for you, and their only job is keeping you satisfied now and in the future.
Looking for More Information?
If you’re considering an annuity, we have a large library of additional information available here [link] to help guide your decisions.