A is for Annuity: All About Annuities

What is an annuity? Financial products issued and distributed by financial institutions and purchased by individuals are designed to provide a steady income stream, typically for retirement.

The key feature of annuities is the longevity risk protection they offer; if the insured lives longer than planned the insurance companies still pay even if the payout is more than the contract is worth. Let’s venture into the classroom to learn what annuities are to see what this financial tool can do for you.

Different Types of Annuities

Among the various types of annuities available, the five common ones include immediate, deferred, fixed, variable, and fixed indexed.

• Immediate Annuities: Annuities offer a unique financial advantage: after you deposit a lump sum, they provide a steady stream of payments, ensuring a reliable income.
• Deferred Annuities: Unlike immediate annuities, these don’t start paying out until after your initial investment. Instead, you can choose a future age to receive payments, allowing your investment to grow over time.
• Fixed Annuities: These offer the security of a guaranteed minimum interest rate and fixed periodic payments to you.
• Variable Annuities: The owner can receive larger future payments if the annuity investments do well and smaller payments if its investments do poorly.
• Fixed Index Annuities: These unique annuities offer returns tied to index performance, like the S&P 500, combining stability with growth potential.

What are Riders?

Annuities come with optional add-ons called riders, available for an extra fee. Each rider provides unique benefits and features that vary by annuity type. Here’s a brief overview:

• Lifetime Income Rider: Guarantees a flexible or enhanced income for life, ensuring financial security throughout your retirement.
• Death Benefit Rider: This rider ensures that your beneficiaries receive an enhanced death benefit, even if you have already started receiving annuity payments.
• Return of Premium Rider: This rider guarantees that you or your beneficiaries will receive the entire value of the initial premium paid into the annuity.
• Long-term Care Rider: Offers additional funds—sometimes up to twice the standard income benefit amount—for a specified period to help cover long-term care if the contract holder moves to a nursing home or assisted living facility.

Phases of an Annuity

Annuities have two phases: the accumulation and annuitization phase. Each has its benefit and purpose.

• Accumulation Phase: This is the phase where you fund the annuity. At this time, the money you invest grows on a tax-deferred basis.
• Annuitization Phase: Better known as the payout phase, begins when payments to the investor commence, providing a stream of income as agreed upon in the contract.

Who benefits from Annuities?

Annuities have clear benefits but also potential downsides. Withdrawals during the surrender period incur penalties, and once you commit to a contract, there’s no turning back. Due to their complexity and potential costs, it’s wise to seek advice from a financial advisor at 210 Financial before investing in annuities.

Annuities offer retirees a secure income source, protecting them from outliving their savings. This stability is invaluable, especially in uncertain financial times, making annuities an appealing option for long-term financial planning.  

Annuities vs. Life Insurance

Insurance provides financial independence against risk. Life insurance covers an individual’s life, enabling beneficiaries use the payout for expenses following the insured’s death. Annuities are the juxtaposition of life insurance. People get annuities because they address longevity risk, making them ideal for retirees.

Key Takeaways

Remember to do your research and keep learning. Understanding the available options empowers you to make an informed decision, ensuring they maximize the benefits of annuities. Download this 12-page informational to help answer questions on annuities and determine if they are right for you.
 

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The financial advisors at 210 Financial are always there to help you understand which annuity fits your needs and preferences. Reach out to any of our financial advisors here at 210 Financial for a complimentary review of your finances and help answer any additional questions you may have about annuities.

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Any references to protection benefit or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims paying ability of the issuing insurance company. An annuity is intended to be a long-term, tax deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Consult a tax advisor for specific information. This is not a recommendation to surrender or otherwise purchase an insurance product. You should review your specific policy and financial situation with your advisor.

210 Wealth Management, Inc., d/b/a 210 Financial, is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. 210 Financial, Form ADV Part 2A & CRS can be obtained by visiting: https://adviserinfo.sec.gov and search for our firm name.  Insurance products are offered through 210 Financial, Inc. d/b/a 210 Financial.