Annuities Overview

Are you trying to plan for an income when you retire to supplement your social security and pension? Do you want it to be a guaranteed income no matter what the economy is doing? You may want to consider a retirement annuity?

Some people choose not to use annuities because they do not understand them. Our specialists at Michael Whitaker and Associates can help. Understanding annuities does not take a college degree, let’s take a closer look.

Basically an annuity is a type of insurance contract that accumulates a value over time and can provide a steady stream of income. In other words an annuity is a long term investment that will bring you a steady monthly income for a period of years or for your entire life. You can even have a joint annuity where payments continue if you or your spouse passes away.

Types of Annuities

There are two categories of annuities under which all the other types fall, they are variable annuities and fixed annuities.

Fixed Annuity

A fixed annuity is held in an insurance companies general account and your principle is not at risk to market fluctuations. It pays a certain interest rate for a period of years. Fixed annuities can be open with one single payment called a single premium annuity. Others can be opened where you make periodic contribution such as monthly or quarterly. This is called a flexible premium annuity. A fixed indexed annuity is a type of fixed annuity. They offer a fixed interest rate but unlike the traditional fixed annuities you can also choose to have some or all or you premiums measured by an index such as the S&P 500. Allocating your premium into an index allows you to capture the upside returns of the market without any downside market risk to your principle or gains.

Variable Annuity

A variable annuity is an annuity with a higher risk than fixed annuities because your money is placed into a separate account within an insurance company. This means that the annuity owner is responsible for the downside market risk but has unlimited upside earning potential by investing in subaccounts within the annuity.

Types of Annuity Payments

It is important to know that when you choose a structured payout you are in fact annuitizing your annuity. Be careful because once you annuitize, you can never change your mind.

Over the past several years insurance companies realize that people are living longer than ever before. Many retirees are in fact outliving their money. Most insurance companies fixed or variable offer a lifetime income rider for a fee that guarantees you an income for the rest of your life or lives if you set it up as a joint annuity. This reduces a risk called longevity risk (the risk of outliving your money.)

These guaranteed monthly payments are based on the claims-paying ability of the insurance company.

It is also important to know that since annuities are long term in nature, withdrawal or surrender charges may apply if more than 10% is removed in a 12 month period. Some companies offer short penalty periods and some have longer penalty periods.