- Annuities, which are contracts with insurance companies, are products that investors might consider when planning for retirement or seeking to turn assets into a stream of income.
- Money invested in annuities grows on a tax-deferred basis.
- While all annuities are regulated by state insurance commissioners, variable annuities are also regulated at the federal level by the U.S. Securities and Exchange Commission (SEC) and FINRA.
- Annuities may be either immediate or deferred, depending on when you start receiving payments.
- The different types of annuities—fixed, variable and indexed—come with different risks and potential rewards. Take time to learn the differences and compare annuities to other retirement savings vehicles to determine what will best meet your needs.
- Annuities are complex and can be costly. Make sure you understand all the fees, expenses, charges, and any features or added benefits (often sold as “riders” at an additional cost) before making a purchase.
- Variable annuities can feature surrender periods of eight years or more. During this time, you can be assessed penalties if you liquidate your annuity. Therefore, you should give careful consideration to how much of your funds are concentrated in the investment and your need for liquidity during the surrender period.
An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. You buy an annuity either with a single payment or a series of payments called premiums.
Some annuity contracts provide a way to save for retirement. Others can turn your existing savings into a stream of retirement income. Still others do both. If you use an annuity as a savings vehicle and the insurance company delays your payout for the future, you have a deferred annuity. If you use the annuity to create a source of retirement income and your payments start right away, you have an immediate annuity.
Both immediate and deferred annuities can be either fixed or variable, which changes the risk profile of your investment. Indexed annuities, also called equity-indexed or fixed-index annuities, are a hybrid. While all annuities are regulated by state insurance commissioners, variable annuities are securities and therefore are also regulated by the SEC and FINRA. Certain forms of these annuities are also sometimes referred to as “buffer annuities.” Buffer annuities can feature both upside limits and downside protection and can have complex structures with similarities to options contracts.
Annuities are often products investors consider when they plan for retirement. They are often marketed as tax-deferred savings products. However, they come with a variety of fees and expenses—such as surrender charges, mortality and expense risk charges and administrative fees—and can have high commissions. You may also incur charges for special features and riders, such as stepped-up death benefits, guaranteed minimum income benefits, long-term health insurance or principal protection.
In addition, there may be state guarantees in the event of an insurance company's failure, but annuities are not guaranteed by the FDIC, SIPC or any other federal agency.
Annuities are a popular choice for those seeking certainty and predictable income streams in retirement; however, they can also be complex and confusing. Be sure to understand the contract features and riders, costs, and restrictions involved before making an annuities purchase.