Annuities
Annuities for Stability, Income, and Long-Term Planning
Annuities are insurance contracts that can be used to help protect accumulated savings, provide predictable interest or income, and address certain long-term retirement needs. The right approach depends on what you want the money to accomplish, when you may need access to it, and which guarantees and tradeoffs matter to you.
What Is an Annuity?
An annuity is a contract with an insurance company. Depending on the type of annuity, it may be designed to accumulate value over time, provide income later, or help create a more predictable source of retirement income.
Annuities are not all the same. Interest-crediting methods, access to money, surrender periods, income options, guarantees, and other contract features can vary significantly.
The important question is not simply, “Should I buy an annuity?” It is, “What do I need this money to do, and does an annuity fit that need?”
Why Might Someone Consider an Annuity?
An annuity may be worth considering when a specific retirement or long-term financial need calls for greater predictability or contractual guarantees.
Protecting Principal
Some fixed annuities provide contractual protection from direct market losses, subject to the terms of the contract, withdrawals, surrender charges, and the financial strength and claims-paying ability of the issuing insurance company.
Predictable Interest
A fixed annuity may provide an interest rate that is guaranteed for a stated period.
Tax-Deferred Accumulation
Interest credited inside an annuity generally grows tax-deferred until money is withdrawn.
Retirement Income
Certain annuities can be structured to provide income for a specified period or, depending on the contract and elected option, for life.
Reducing Market Exposure
Someone who does not want a portion of retirement assets directly exposed to market fluctuations may consider allocating some assets to an appropriate fixed insurance product.
Creating More Predictability
An annuity may help make a portion of a retirement strategy more predictable when combined appropriately with other resources.
Fixed Annuities
A fixed annuity is an insurance contract that credits interest according to terms established by the insurance company.
Depending on the contract, the interest rate may be guaranteed for a specified period. At the end of that period, the insurer may declare a new rate subject to the contract's minimum guarantees.
Fixed annuities can appeal to people who value predictability and do not want that portion of their money directly exposed to stock-market fluctuations.
Key considerations:
Fixed annuities are insurance contracts. They are not savings accounts, CDs, or bank deposits.
Fixed Indexed Annuities
A fixed indexed annuity is an insurance contract whose interest-crediting method may reference the performance of an external market index.
The annuity owner is not directly invested in the index. Instead, the insurance company uses a contract-defined formula to determine how much interest, if any, is credited during a crediting period.
The formula may include features such as:
- Participation rates
- Caps
- Spreads
- Index-crediting periods
- Floors
- Other contract-specific limitations
If the referenced index declines, the index-linked interest credit for that period may be zero rather than negative, depending on the contract. However, withdrawals, surrender charges, rider charges, and other contract provisions can still affect the value available to the owner.
Fixed or Fixed Indexed?
Fixed Annuity
A fixed annuity generally emphasizes predictability. Interest is credited at a rate established by the insurer according to the contract, often with a stated guarantee period.
Key considerations:
- Known rate for a stated period
- Simpler crediting structure
- Contractual minimum guarantees
- Surrender period
- Access to funds
- Renewal rate after the guarantee period
Fixed Indexed Annuity
A fixed indexed annuity uses a contract formula tied to an external market index to determine interest credits. It may provide the opportunity for higher interest credits than a traditional fixed annuity during some periods, but credited interest is limited by the contract's terms.
Key considerations:
- Index-crediting method
- Participation rate
- Cap or spread
- Crediting period
- Surrender period
- Access to funds
- Optional riders and charges
What Do You Need the Annuity to Do?
An annuity should be evaluated based on the job the money is intended to perform.
Accumulation
Some annuities are primarily used to preserve and accumulate retirement assets over time. In this situation, interest-crediting terms, guarantees, liquidity, surrender periods, and the expected holding period are especially important.
Income
Other annuity strategies are designed around creating future or current retirement income. Depending on the contract, income may be created through annuitization or through an optional income benefit or rider.
Income features can differ substantially between contracts, and optional riders may involve additional costs or restrictions.
Annuities Are Long-Term Contracts
An annuity may not be appropriate for money that you expect to need in the near future. Many contracts have surrender-charge periods that can reduce the amount available if too much money is withdrawn early.
Before choosing an annuity, it is important to understand:
Keeping sufficient liquid savings outside an annuity can be an important part of deciding whether an annuity fits the overall financial picture.
Understand the Guarantees
Annuity guarantees are contractual obligations of the issuing insurance company. They are not guarantees of the federal government, and they depend on the financial strength and claims-paying ability of the insurer.
That makes the insurance company itself an important part of the evaluation, along with the contract terms.
Factors Fair & Kind may review:
How Are Annuities Taxed?
Annuity earnings generally accumulate tax-deferred, meaning taxes on those earnings are typically postponed until money is withdrawn.
The tax treatment of withdrawals depends on factors such as how the annuity was funded, the type of account holding it, the owner's circumstances, and applicable tax law. Withdrawals before age 59½ may also be subject to an additional federal tax in some situations.
Fair & Kind can explain how the insurance contract works, but individual tax decisions should be discussed with an appropriate tax professional.
An Annuity Isn't Right for Everyone
An annuity may be useful when its guarantees and features match a specific financial need. It may be less appropriate when liquidity, short-term access to funds, or other priorities are more important.
The decision should start with the purpose of the money rather than with the product.
How Fair & Kind Helps
Our job is to help you understand what the annuity is designed to do, what it costs, what is guaranteed, and what you give up in exchange for those guarantees.
Understand the Goal
We start by identifying what you want the money to accomplish, such as accumulation, principal protection, or retirement income.
Review Whether an Annuity Fits
We consider liquidity needs, time horizon, existing retirement resources, and other important circumstances before focusing on a product.
Compare Appropriate Options
We review relevant contract features, guarantees, crediting methods, surrender periods, income options, and costs in plain language.
Explain the Tradeoffs
We help you understand both the benefits and the limitations before you decide whether to proceed.
Frequently Asked Questions
Common questions about annuities, answered in plain English.
A More Predictable Retirement Starts With Understanding Your Options
We can help you understand how fixed and fixed indexed annuities work, what the guarantees mean, and whether an annuity fits the role you need it to play.
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