Annuities - "Reverse Life Insurance"

Unlike a life insurance policy that is designed to pay out upon death, annuities are designed to be paid out while the holder is alive.  Simply put, an annuity is a contract between you and the company through which your earnings are allowed to grow and compound, usually tax deferred. This is a powerful tool to help you prepare for your retirement or other long-term financial needs. Premiums are deposited into an annuity where competitive interest rates allow the value of those premiums to grow.  Distributions may be taken in several ways, ranging from immediate payouts over several years to lifetime payouts that ensure that you never outlive your retirement savings.There are several types of annuities, including...

  • Immediate Annuities:  As the name implies, these annuities are designed to provide an immediate income stream from a single premium.
  • Deferred Annuities:  Designed as a long-term retirement option, these annuities defer annuitization (distribution) for a certain time, allowing your money to grow tax-deferred.
  • Traditional Fixed Annuities: Single or Flexible premium deferred annuities that may offer a bonus rate in the first year followed by a base rate that can fluctuate for the remainder of the surrender period. 
  • Multi-Year Guaranteed Annuities: Single premium deferred annuities that guarantee the interest rate for the entire surrender period. (Systematic withdrawals of interest available immediately.)
  • Equity Index Annuities: Single or Flexible premium deferred annuities that link you to market-type returns while guaranteeing no risk to principal. There are several index options to choose from, and penalty-free withdrawals are usually available after the first year.
  • Variable Annuities: Single or Flexible premium deferred annuitites that allow you to match your investments with your financial goals by choosing from a number of Separate Account investment portfolios. Variable annuities are subject to market risk.

 The demise of traditional pension plans means many retirees face the frightening possibility of outliving their savings. True, Social Security is there as a minimal safety net for most people, but it was never meant to be a full retirement plan. One way to ensure your money – and your lifestyle – will last as long as you do is to purchase a lifetime annuity.

Think of an annuity as a do-it-yourself pension plan. You provide a lump sum of money to an insurance company and in return you get a guaranteed stream of regular payments for the rest of your life (or for some specified period). Broadly speaking, annuities come in two varieties, variable and fixed. Variable annuities include an investment component.  By allocating your money directly into mutual funds or stock options, they offer varying levels of risk, and therefore varying levels of gains or losses.  A fixed annuity is much simpler. Your lump-sum savings are translated into a stream of payments that does not change. The size of your payment is based on your age, prevailing interest rates and payout options chosen at the time of annuitization.  Some companies will allow you to customize an annuity agreement in certain ways at the time of purchase, such as adding a cost-of-living rider or arranging for payments to continue until both you and your spouse die.

For more information on fixed and fixed index annuities, click here.

Depending on your age, financial situation and policy provisions, certain tax penalties may apply when making any investment.  This information should not be used as a basis for legal and/or tax advice. In any specific case, the parties involved should seek the guidance and advice of their own legal and tax counsel.