Educational resources to help you sort through the complexities of annuities and investing.
Learn About Annuities
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So what are annuities and how do they work?
Annuities are designed to help your retirement plan succeed in its most vital phases - accumulation and distribution. Learn more about how they work and the options that may be available to you.
A tax-deferred annuity is a contract between the owner and an insurance company. An annuity is tax deferred and may provide long-term growth potential as earnings are allowed to grow tax deferred until withdrawn. Tax-deferred annuities have two distinct phases: accumulation and income.
During the accumulation phase, the policy value can grow over time through lump-sum or periodic premium payments, potential earnings, and the compounding effect of tax-deferral. With the income phase, you can convert your policy value to regularly scheduled income payments based on the income option you select through annuitization.
How are income payments determined?
The amount of the income payments depends on the policy value at the time of annuitization, the age and life expectancy of the annuitant, and the income option you select.
The type of annuity you may have may also affect the payment amounts. If you have a fixed annuity, the income payment amounts stay the same. If you have a variable annuity, the income payment amounts may vary depending on the performance of the underlying investment options but may stay the same if you choose a fixed income option.
Types of income options
Most annuity contracts offer a variety of income options to suit your individual needs:
- Lifetime income. Periodic income payments (generally monthly, quarterly, semi-annually, or annually) are guaranteed by the insurance company for as long as the annuitant lives. This is a popular option because it provides steady income that can't be outlived. Payments stop upon the death of the annuitant.
- Lifetime with period certain. Periodic income payments are guaranteed for as long as annuitant lives, or for a specified time period (5, 10, 20 years etc.), whichever is longer. If the annuitant dies during the specified time period, income payments may continue to the named beneficiary until the end of the period. Income payments then stop.
- Period certain. Periodic income payments are guaranteed for a specific period (5, 10, 20 years etc.) and then stop. If the annuitant dies during the specified time period, payments may continue to the named beneficiary until the end of the period.
- Joint and survivor. Lifetime periodic payments are based on the ages and life expectancies of two people, usually spouses. When one annuitant dies, payments continue to the surviving annuitant until that person's death.
If you're thinking about purchasing an immediate annuity, or annuitizing a current tax-deferred annuity, keep in mind the following important considerations:
- Typically, once you select an income option and income payments begin, you cannot change or revoke your selection.
- You may want to talk with a qualified tax professional for guidance.
- An annuity's guarantees are based on the claims-paying ability of the issuing insurance company. Because an annuity contract can last for decades you should be confident about the financial strength and longevity of the issuing insurance company.
You can check the issuer's financial strength and claims-paying ability ratings from independent rating agencies such as Standard & Poor's, Moody's, A.M. Best, and Fitch. Remember, ratings do not apply to the safety or performance of the subaccounts.