Annuities 101: 5 Commonly Asked Questions about Annuities as a Retirement Income Tool

If you are approaching retirement, you may be researching various investment tools and vehicles that could help you fund your lifestyle and living expenses. In your research, you have probably read or heard about annuities as popular retirement income vehicles.

An annuity may be an effective retirement planning tool for you. However, they’re not for everyone. There are also many different types of annuities with a variety of features, so it’s important you choose the right product for you.

If you’re not familiar with annuities, you may find it difficult to understand the different components, features and benefits. Below are some commonly asked questions about annuities and how they may fit into a retirement plan. These questions and answers should give you a functional understanding of annuities, so you can determine whether they fit into your retirement picture.

What is an annuity?

In its most basic form, an annuity is a contract between an individual and an insurer, in which the insurer pays a stream of income to the individual for a specific period of time.

In some annuities, called single premium immediate annuities, the annuity payments begin as soon as the contract is opened. The contract owner makes a one-time premium payment. The insurance company then calculates the payment amount based on the amount of the premium, the individual’s life expectancy and prevailing interest rates.
In other annuities, the annuity payments are deferred until a later date. The funds are then able to earn interest and accumulate over time. The contract owner may be able to make withdrawals, change the investment allocation or even leave the annuity to his or her heirs as a death benefit.

In deferred annuities, no taxes are paid on earnings until money is withdrawn from the contract. That feature may make an annuity a tax-efficient way for you to accumulate money for retirement.

How do I make money in an annuity?

It depends on the type of annuity you own. If you have a fixed deferred annuity, the insurance company will pay a set interest rate into your contract on an annual basis. The interest rate is set in advance for a specific period of time. At the end of that period, your interest rate may change, depending on a variety of factors.

Another type is the fixed indexed annuity. In this type of contract, the interest rate is linked to the performance of an underlying index, such as the S&P 500. If the index performs well, you may receive a higher interest rate. If the index performs poorly, you may receive little or no interest.

What happens to my annuity after I die?

All deferred annuities have death benefits. When you pass away, the death benefit is left to whomever you named as the beneficiary on the annuity. The death benefit may be taxable to your beneficiary, depending on how much growth you had in the contract.

In a single premium immediate annuity, there may not be a death benefit. If you accepted payments for only your life, the payments end when you pass away. However, you often have the option of taking a reduced payment and spreading it across two lives. If you choose this “joint” option, the payment would continue for the other person on the contract.

How do I use my annuity to fund my retirement?

There are a number of ways to use an annuity to fund your retirement. You could use a single premium immediate annuity to create a guaranteed stream of lifetime income for you or for you and your spouse.

You could also use a fixed deferred annuity and simply withdraw the interest as income. Another option is to use a fixed indexed annuity with a guaranteed lifetime income* rider. This optional benefit allows you to withdraw a specific percentage of your contract every year. You are guaranteed to take that amount as a withdrawal for life, regardless of how the contract performs.

Talk to your financial professional to learn more about how you could use an annuity as part of your retirement income plan. They can help you determine whether an annuity is suitable and which type of annuity may be right for you.


*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.

This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
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