Learn the basics of retirement income planning and annuities, so you can have an informed conversation with a licensed insurance professional.
An annuity is a contract issued by an insurance company that is generally designed to help provide income, often used as part of retirement planning. In exchange for a premium, the insurance company agrees to make payments to you, either immediately or at a future date. The two broad categories are fixed annuities and fixed indexed annuities — each is built for different goals, guarantees, and risk tolerances.
In simple terms, an annuity works like this: you pay a premium to an insurance company, either as a lump sum or over time, and in exchange the company credits interest to your contract value and can later convert that value into a stream of income, including options designed to provide income for life.
Fixed annuities are generally designed to credit interest at a rate declared by the issuing insurance company, which may be guaranteed for an initial period and can adjust afterward, depending on the contract. Because the rate is generally set in advance, fixed annuities may appeal to those seeking predictable, steady growth without direct exposure to market performance.
Interest is generally credited at a declared rate, which may be guaranteed for an initial period
Contract value is not directly exposed to stock market losses, subject to the terms of the contract
Growth is generally tax-deferred until withdrawals begin, depending on how the contract is funded
May include optional riders, such as income or death benefit riders, depending on the product and carrier
Features, availability, and rates vary by product and carrier and are subject to change. Not all products offer all features described above.
Fixed indexed annuities are generally designed to credit interest based in part on the performance of a market index, such as the S&P 500, subject to caps, participation rates, spreads, or other limits set by the issuing carrier. In exchange for these limits, fixed indexed annuities typically offer protection from direct market losses on the contract value, even when the referenced index declines.
Because interest crediting is tied in part to an index but principal is generally protected from direct market losses, fixed indexed annuities may appeal to those seeking some upside growth potential with less downside risk than direct market investing.
Interest crediting is generally linked in part to the performance of a market index, subject to caps or participation rates
Contract value is generally protected from direct losses when the referenced index declines, subject to contract terms
May offer optional riders for lifetime income or enhanced death benefits, depending on the product and carrier
Caps, participation rates, and spreads can change at renewal, which may affect future interest credited
Features, availability, and index-crediting methods vary by product and carrier and are subject to change. Not all products offer all features described above, and past index performance does not guarantee future results.
Fixed annuities generally credit interest at a rate set by the carrier, offering predictable, steady growth. Fixed indexed annuities generally credit interest based in part on the performance of a market index, subject to caps and participation rates, while typically protecting contract value from direct market losses. The right choice depends on your individual goals, risk tolerance, and time horizon, and is best discussed with a licensed insurance professional.
Certain annuities may offer the option to convert contract value into a stream of income, including options designed to provide income for life. Some fixed and fixed indexed annuities are also designed to help protect contract value from downturns in the market, depending on the specific contract terms.
Whether an annuity may fit into your retirement plan depends on your individual goals, time horizon, other assets, and risk tolerance. A licensed insurance professional can help you understand whether a particular product may be appropriate for your situation.
Are you looking for a guaranteed, predictable rate, or the potential for index-linked growth?
How important is protecting your contract value from market downturns?
Do you anticipate needing access to your funds before any surrender period ends?
Are you interested in converting contract value into a guaranteed stream of income?
All guarantees associated with an annuity, including any income guarantees, are backed by the claims-paying ability of the issuing insurance company — not by a bank, the government, or any other entity.
Withdrawals from an annuity may be subject to surrender charges, taxes, and/or penalties, particularly if taken during an early withdrawal or surrender period or before a certain age.
Caps, participation rates, fees, and other terms vary by product and carrier and can change the amount of interest credited or income received.
Any tax treatment referenced in connection with annuities is general in nature. You should consult a qualified tax professional regarding your individual situation.
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