An annuity is a financial product, often offered by life insurance companies. Annuities provide a stream of income for policyholders during retirement.
Although there are many different types of annuities, all share the same basic structure. An individual purchases an annuity contract—either though set premiums or a lump sum—and then later, benefits are triggered, and the individual receives regular payments from the contract. In some instances, the benefit payments can last the entirety of the individual’s life.
Although there are many different types of annuities available, there are two basic categories: deferred and immediate.
In a deferred annuity, the contract is purchased through regular premiums. Benefit payments are delayed for a certain period, during which the cash value of the annuity accumulates tax-deferred at a specified interest rate. In a fixed deferred annuity, the insurance company sets the interest rate. In a fixed indexed annuity, a popular annuity type, the interest is based on the performance of a stock market index, such as the Dow Jones Industrial or the Standard and Poors 500. Although the interest is based on stock index, fixed indexed annuities have no direct participation in the market.
With an immediate annuity, the contract is purchased with a lump sum premium and then benefits are issued nearly immediately (generally within a year of purchase) hence the common name of Single Premium Immediate Annuity.
Annuities, as with other financial products like life insurance, can be enhanced with additional features called riders. A popular supplemental feature with annuities is the lifetime income rider. A lifetime income rider provides guaranteed benefit payments for the remainder of annuitant’s life. With other riders and variations, it may be also possible to issue an annuity’s remaining balance to surviving beneficiaries.
Every person’s situation is unique and requires solutions that best fit for them and their retirement goals. That said, annuities can be a great solution at ensuring a stream of income during retirement, and with a lifetime income rider, a source of income that cannot be outlived.
A fixed annuity may appeal to an individual that desires predictability with both premiums and benefit payments. Fixed index annuities may appeal to individuals who desire more upside potential in addition to a source of guaranteed retirement income. Immediate annuities may appeal to consumers seeking to convert a large sum of money into a stream of retirement income.
An annuity interest rate is what the insurance company uses to determine cash value growth before benefits are triggered. Not only is important to consider the rate at which the cash value component grows, it is important to understand how the interest is credited the account. Amongst carriers and product types, you may have many options, which is why it is best to work with a trusted professional to determine what fits best with your objectives.
More questions? Contact us today!