Understanding Annuities: Are They Right for You?
An annuity is a type of insurance policy that pays out a steady stream of income in return for an investment into the annuity. You may opt to receive income for a lifetime or for a set number of years. Annuities are often used by investors as a retirement planning strategy, as they dole out steady payments during retirement.
What are the Different Types of Annuities?
There is a range of different annuities you can choose from:
Immediate vs. Deferred
With an immediate annuity, you start receiving income directly after you make the investment. This is a good option for investors nearing retirement. A deferred annuity accumulates money and pays out income once a predetermined period has passed. Deferred plans typically pay out more than immediate plans.
Fixed vs. Variable
Under a fixed annuity, you get a fixed payment each year. The insurer guarantees a fixed return on your initial investment. A variable annuity pays out fluctuating amounts depending upon the market performance of the annuity. There is a risk of unpredictability with variable annuities, and payments may be smaller if the investment doesn’t perform well.
Cash Refund vs. Life
A cash refund annuity comes with a death benefit, whereby your heirs are guaranteed some or all of the remaining income payout after your demise. A life annuity only lasts over your lifetime, with no death benefit for your beneficiaries.
A hybrid annuity is an income product that gives you the option of investing in both fixed and variable annuities. This is a risk-control plan as it allows you a safe stream of income while simultaneously allowing you to be connected to long-term market growth.
Longevity insurance provides steady income once you attain old age, typically 80-85 years. At that age, your nest egg may be running low, and the lifetime payments from the annuity are designed to boost your retirement funds.
An equity-indexed annuity combines features of both fixed and variable annuities. As with a fixed annuity, you get a guaranteed minimum investment return, typically 2% to 3%. However, similar to a variable annuity, your payment is linked to stock market performance, as the amount of return is tied to the performance of an equity index.
Advantages of Annuities
- Annuities allow you to build a larger nest egg for your retirement.
- They are tax-deferred.
- There is no limit to the amount of investment you can contribute to an annuity, which means you can put away a larger nest egg for the future.
Disadvantages of Annuities
- The insurer takes a significant chunk out of your payment as commission.
- There are charges for pulling money out of an annuity plan within the initial several years of investment.
- Variable annuities carry steep annual expenses, such as annual insurance or investment management fees.
An independent financial advisor can help you understand the benefits and disadvantages of various annuity plans, since these are often dependent on your income, retirement goals and current needs. Get in touch with the insurance experts at LifeCentra to learn more!