Annuities

How an annuity works

An annuity is a contract between you and an insurance company. You pay in — either a single lump sum or a series of payments — and in return the company agrees to grow your money, pay you income, or both, according to the terms of the contract.

Most annuities have two phases. During the accumulation phase, your money grows tax-deferred. During the income phase, you can turn the value into regular payments, take withdrawals as you need them, or leave it to grow for your heirs. Some annuities skip straight to income.

The main types

• Fixed annuities credit a stated interest rate for a set period. They are similar in spirit to a certificate of deposit, but with tax deferral and the backing of an insurance company rather than FDIC insurance.
• Fixed indexed annuities credit interest based partly on how a market index performs. Your gains are limited by caps, participation rates or spreads, but your principal is not reduced when the index falls.
• Immediate income annuities turn a lump sum into payments that begin right away and can last for your lifetime, for a set number of years, or for the lifetimes of two people.
• Deferred income annuities work the same way, but payments begin on a future date you choose.

Income for life

One of the most valued features of an annuity is the option to receive income you cannot outlive. Some contracts build this in; others offer it through an optional rider, usually for an added cost.

For many retirees, covering essential bills — housing, food, insurance — with dependable income alongside Social Security brings real peace of mind. It can also make the rest of your savings easier to manage, because day-to-day market ups and downs matter less when the basics are already taken care of.

How we help

We start with your retirement picture: the income you need, when you plan to claim Social Security, your other savings and how much flexibility you want to keep. Then we explain in plain English how each option would work for you — including the fees, surrender periods and limits that come with it — and compare choices from the insurance companies we represent. If an annuity does not fit your goals, we will tell you so.

Things to consider

• Annuities are long-term contracts. Plan to leave the money in place through the surrender period.
• Keep an emergency fund elsewhere. Use savings you will not need on short notice.
• Understand every rider and fee. Optional benefits can add cost, so make sure each one earns its place.
• Guarantees come from the insurer. They are backed by the financial strength and claims-paying ability of the issuing company, so its ratings matter.
• Annuities are not bank deposits. They are not FDIC-insured.