Annuities 101

The term annuity seems to have many different reactions and responses depending on what people have read or heard. In its most basic sense, however, an annuity is a financial contract between an insurance company and a person. By signing the contract, you’re paying premiums in exchange for receiving a future income stream from the insurance company. You can get it through withdrawals, annuitizations, or rides. Because annuities are long-term, they’re often used as retirement strategies. Here’s what an annuity is:

Who can set-up an annuity?

There are three parts to an annuity policy: the owner, the annuitant, and the beneficiary. It’s the owner’s job to make decisions about the policy and pay the premiums. An annuity owner can be a person, a retirement plan, a trust, or a charity.

What about the annuitant and beneficiary?

The annuitant is the person who the insurance company’s measure of life, the death of the annuitant triggers a death benefit, or their age is used to calculate income payments. The annuitant could be the same as the owner or different.

The beneficiary is a person who will receive a death benefit payout, if there is an account value, when the owner/annuity passes away.

How does an annuity grow?

There are numerous types of annuities; fixed, variable, and fixed indexed.  All of these annuities offer the same contract structure but vary on how the premium grows. Let’s look at how these three types of annuities grow,

For every type of annuity, the account growth is tax-deferred; meaning taxes are not paid until the money is withdrawn from the annuity.

What if I need to access my money?

Annuities have a gradually decreasing percentage of charges, surrender charges, that will be incurred if the policy is surrendered before the agreed upon term is over. Annuities can have varying surrender schedules. However, most annuities offer the client the ability to take 10% free withdrawals every contract anniversary. As annuities are designed to be a long-term solution designed for retirement, withdrawals prior to 59 ½ could be subject to the IRS early withdrawal penalty, which overrides any carrier’s contractual provisions.

In summary, annuities can be a valuable tool in a comprehensive retirement strategy. By understanding how annuities work and the benefits such as tax-deferred growth and lifetime income you can help your clients make informed decisions.