Annuities that turn savings into retirement income.
An annuity is a contract with an insurance company that helps turn your savings into a stream of income. Because retirement income needs a plan, this page explains how annuities work, which types exist and who they may suit.
A contract built around income.
An annuity is a contract between you and an insurance company. You pay the company a lump sum or a series of premiums, and in return it agrees to make payments to you. Payments can begin right away or at a future date, so you can match the contract to your timeline. They can also last for a set number of years or for the rest of your life, depending on the option you choose.
Annuities are insurance products, not bank accounts. Because of that, the FDIC does not insure them, and their guarantees depend on the claims-paying ability of the issuing company. This page covers fixed, fixed indexed, immediate and deferred annuities. However, it does not cover variable annuities, since they are securities that regulators treat differently.
How an annuity works, start to finish.
Fund the contract
Because contracts differ, you may pay a premium all at once or over time, depending on the product.
Savings accumulate
In a deferred annuity, your money grows during the accumulation phase. While it grows, you generally pay no tax on the growth until you take money out.
Choose how to take income
When you are ready, you can choose regular income payments, a process called annuitization. Alternatively, the contract may offer other income options, so review them with your agent.
Receive payments
The insurer then makes payments according to the option you selected. In addition, any remaining value goes to your beneficiaries when the contract includes a death benefit.
Annuity types and terms, in plain English.
Fixed annuity
A fixed annuity earns an interest rate that the insurer sets for a stated period. Because the rate is stated up front, you know what to expect during that period.
Fixed indexed annuity
A fixed indexed annuity credits interest based in part on how a market index performs, with a floor and a cap or participation rate. However, your money is not invested directly in the market.
Immediate annuity
An immediate annuity begins paying income soon after you fund the contract. As a result, it suits people who want income right away.
Deferred annuity
A deferred annuity grows for a period before income begins, for example until retirement. Therefore, it suits people who are still saving.
Surrender period and charge
The surrender period is a set time when withdrawals above a limit may carry a fee. Many contracts also allow limited free withdrawals each year, so you keep some flexibility.
Annuitization
Annuitization turns your annuity value into a stream of regular payments. Once you choose this option, you usually cannot reverse it, so discuss it carefully.
Who it’s for, and who it may not suit.
Often a good fit
- Retirement is near or underway, so you want a source of income you can plan around.
- Protecting principal from market declines matters to you, while you still want to earn interest.
- Other retirement accounts already hold your savings, so you want additional tax-deferred growth.
- Because you will not need the money during the surrender period, you can set it aside.
May not be the best fit
- Quick access to most of your money may matter to you, since surrender charges can apply.
- Withdrawing earnings before age 59½ can trigger a federal tax penalty in addition to ordinary income tax, so that timing may not suit you.
- Growth that matches direct market investing is not what fixed or fixed indexed annuities offer, but they do limit downside risk.
- FDIC insurance does not cover annuities, so they may not suit you if you need that guarantee.
What carriers look at for annuities.
Insurers do not medically underwrite annuities the way they underwrite life insurance, but several other factors apply.
Age
Carriers set minimum and maximum issue ages, so the range depends on the product.
Premium amount
Also, most annuities require a minimum premium that depends on the carrier and product.
Source of funds
Funds may come from savings or from qualified retirement accounts. However, the tax treatment can differ between the two.
Suitability
State rules require your agent to consider your financial situation, goals and time horizon. As a result, your agent confirms that the annuity fits you before you apply.
Annuity questions, answered.
Is an annuity FDIC insured?
No, because annuities are insurance contracts rather than bank deposits. Their guarantees depend on the claims-paying ability of the issuing insurance company. However, state guaranty associations may provide limited protection if a company fails.
Can I lose money in an annuity?
Fixed and fixed indexed annuities aim to protect principal from market declines. However, taking money out during the surrender period can trigger charges that reduce what you receive. Also, the guarantees depend on the issuer.
How do taxes work with annuities?
Growth stays tax-deferred, so you usually pay no tax until you take money out. When you take earnings out, ordinary income tax applies. In addition, withdrawals before age 59½ may trigger a 10% federal penalty. A tax professional can advise on your situation.
Can I get my money out early?
Many contracts allow limited free withdrawals each year, so you keep some access to your money. However, larger withdrawals during the surrender period may carry a surrender charge.
What happens to an annuity when I pass away?
It depends on the contract and the payout option, so review both before you buy. Many contracts pass any remaining value to your named beneficiaries.
Annuities are insurance contracts that insurance companies issue. The FDIC does not insure them, and they are not bank deposits. Guarantees depend on the claims-paying ability of the issuer. Withdrawals may carry surrender charges and ordinary income tax, and withdrawals before age 59½ may also trigger an additional federal tax penalty. Fixed indexed annuities are not investments in the stock market or any index, because the insurer credits interest using a formula. Opulent Life Financial does not provide tax or legal advice, so please consult a qualified professional.
Planning for retirement income?
Speak with a licensed agent by phone, or request your free quote online. Your dedicated agent will then walk you through your options.