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Annuities

At what age is an annuity right?

What if I want guaranteed income?

How can I supplement my retirement income?

An annuity is a long-term savings instrument that can be used to accumulate assets on a tax-deferred basis. There are many different kinds of annuities, but all share the same basic structure:

  • The contract is purchased, either through regular premiums or a lump sum.
  • At some point in the future (typically retirement), benefit payments are triggered.
  • Depending on the annuity, cash value grows tax-deferred between purchase and triggering event.

There are two main categories of annuities: immediate and deferred.

Immediate Annuities

Obtained through a lump sum payment, benefits from immediate annuities are generally triggered within a year of purchase. Immediate annuities are commonly known as “Single Premium Immediate Annuities” and do not have an accumulated cash value component.

Deferred Annuities

These types of annuities are “deferred” in two senses. First, benefits are delayed for an extended period of time, during which the contract gathers cash value. Second, gains within the annuity account accrue tax-deferred until distribution, meaning a consumer won’t face a tax liability until benefits are triggered.

Several kinds of deferred annuities exist in the marketplace.
Generally, they are identified by the means in which they gather cash value.

Fixed Annuities

In a Fixed Annuity (FA), the interest rate may change year to year as set by the insurance company, but usually there will be an ongoing minimum guaranteed rate. Traditional fixed annuities may be a good fit for individuals seeking steady, regular growth and regular benefit payments upon retirement.

Fixed Indexed Annuity

In a Fixed Indexed Annuity (FIA), the contract’s interest rate is tied to the positive movement of a specific stock market index, such as the Dow Jones Industrial or Standard and Poors 500. While the rate is based on index movement, a fixed indexed annuity has no direct involvement with the stock market and is not exposed to negative performance. Fixed indexed annuities may be appropriate for individuals seeking upside potential, with guaranteed returns.

Deferred Income Annuity

A deferred income annuity (DIA) works in much the same way as other deferred annuities, with benefit amounts tied to the purchase amount (usually paid in a lump sum). Deferred income annuities involve a period of deferral and are generally designed to last the rest of an annuitant’s life. The longer the period of deferral, the more the benefits accumulate before distribution.

Among these categories, there may be other levels of customization and variation. One common and useful enhancement is the Lifetime Income Benefit Rider. Typically available for additional fees and charges, a Lifetime Income Benefit Rider secures an annuitant a source of income that cannot be outlived.

What annuity and features will fit your needs, will depend on your unique situation, goals, and objectives.