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What is Annuities




Annuities are financial products that provide a steady stream of income payments, typically during retirement. Here's a more detailed overview of annuities:

An annuity is a contract between an individual (the annuitant) and an insurance company. In exchange for a lump-sum payment or series of payments, the insurance company agrees to provide the annuitant with a regular, guaranteed income stream, either for a set period of time or for the rest of the annuitant's life.

There are several key features and types of annuities:

  • Immediate vs. Deferred Annuities:
  1. Immediate annuities begin making payments right away, usually within 1 year.
  2. Deferred annuities accumulate funds over time before starting payouts, often in retirement.
  • Fixed vs. Variable Annuities:
  1. Fixed annuities provide a guaranteed, predictable payment amount.
  2. Variable annuities have payments that fluctuate based on the performance of the underlying investments.
  • Single-Life vs. Joint-Life Annuities:
  1. Single-life annuities provide payments only for the annuitant's lifetime.
  2. Joint-life annuities continue payments as long as either the annuitant or a named beneficiary is alive.


Benefit of Annuities



  • Annuities are the only financial product that can provide you with guaranteed lifetime income and ensure that you are never at risk of outliving your savings. You can choose other types of disbursements, but lifetime income is most commonly chosen.
  • Guaranteed income for life - Annuities can fill in the gaps when social security, pensions, and other retirement accounts don't provide enough retirement income. Annuities allow you to take a lump sum today and create a steady stream of income paid monthly, quarterly or yearly.
  • Reasonable returns - Traditional fixed annuities provide a safe alternative to bank CD's and savings accounts. Some uncapped index annuities have earned 7-17% in specific years. You earn a portion of market upside without risking your principal. Some of the gains, none of the losses.
  • Tax-deferred growth - Annuities offer triple compounding on your interest. Earn interest on your principal, interest on your interest, and interest on the money normally lost to taxes.
  • Long Term Care Benefits - Some annuities offer 200-300% of your initial deposit in long-term care benefits with an optional rider. There is no cost and everyone qualifies regardless of health.
  • Safety - Insurance companies are forced to set aside $1 for every $1 invested into annuities. Banks fail many times because they take $1 and make $10 in loans that go bad. Annuities don't do this. A banker I used to work with had a huge penny on her desk. She used to tell bank customers that the penny was more than anyone ever lost in a fixed annuity.
  • Leave a Legacy - You can leave a lovely one a monthly, quarterly, or annual check. This can be especially beneficial if you think they might not spend it wisely.


Cost of Annuities



The cost of an annuity can vary significantly depending on a number of factors. Here are some of the key elements that influence the cost of an annuity:

  1. Annuity Type:
    1. Immediate vs. deferred annuities - Immediate annuities generally cost more upfront than deferred annuities. Fixed vs. variable annuities -
    2. Fixed annuities tend to have lower costs than variable annuities.
  2. Age and Life Expectancy:
    1. Younger annuitants will generally pay less for the same annuity payout compared to older annuitants, as they have a longer life expectancy.
    2. Annuity payouts are calculated based on the annuitant's life expectancy, so those with longer life expectancies will pay more.
  3. Payout Options:
    1. Single-life vs. joint-life annuities - Joint-life annuities have higher costs to provide payments for two people.
    2. Guaranteed payment periods - Annuities with longer guaranteed payment periods will have higher costs.
  4. Insurance Company Factors:
    1. Fees and expenses charged by the insurance company offering the annuity. The insurance company's financial strength and credit rating.


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