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Which Annuity Is Right For You?

Annuities were designed to provide cash flow and aim to limit market risk while curbing the chance of running out of money in retirement. Simply, an annuity is a financial product that will pay out an income stream to an individual, primarily used as a replacement for a pension for retirees. Annuities are sold and guaranteed by financial institutions or insurance companies. These companies accept and invest funds from individuals and upon annuitization, give a stream of payments at a later point in time for a specified duration or in some cases for the rest of their lives. Fixed, variable, and indexed annuities are the three most common types of annuities in existence today.

Fixed Annuity

A fixed annuity is a contract typically issued by life insurance companies to those looking for guaranteed return without any market risk.

Variable Annuity

As one of the more commonly known annuities, a variable annuity offers the opportunity to achieve higher returns by investing in subaccounts that contain equities and bonds. Once the annuity is annuitized the income payments can vary based on the performance of the subaccounts.

Indexed Annuity

Indexed annuities are unique because the returns are based on a specific equity-based index. As an example, the S&P 500 Index could be utilized. If the S&P 500 index performs well, your account will perform well. Indexed annuities offer the opportunity to obtain performance with market yields while mitigating the risk of market downturns.

Immediate vs. Deferred

Fixed, variable and indexed annuities can also be classified as immediate or deferred.

An immediate annuity is bought with one payment at the beginning of the contract. The payment guarantees a payment, which will typically start within one month. Immediate annuities may also be referred as “income annuities” or “single premium immediate annuities.”

Deferred annuities are more common. A deferred annuity allows payment to the annuity and gives a payment at a later date. The annuity may be funded over time via monthly contributions or all at once, possibly even decades before payments start.

Surrender Schedules

In most annuities there is a surrender schedule. A surrender schedule dictates what an investor would have to pay if they cancelled the contract prematurely. It can be 3, 5, 7, or greater than 10 years depending on the contract. Typically, the more time chosen gives the investor access to better products. As an example, if someone invests in a 5-year fixed annuity the surrender schedule will be as follows:

The rate goes down every year, and after year 5 the investor is free to walk away with the money and the growth. However, the important thing to note is the amount penalized is based upon the value at the time of the early withdrawal.

Wondering if an annuity is right for you? Contact our experts at Strategic Tax & Retirement to gain some clarity.

Strategic Tax and Retirement

2434 Superior Drive NW, Ste 101

Rochester, MN 55901




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