Annuities are polarizing. There are advisors who love them, there are advisors who hate them, and there are some that like parts of them. But the truth is, they are a wonderful tool when used for the right purposes.
Those looking to generate guaranteed retirement income will find annuities very useful. While those thinking that they’ll be the singular be-all and end-all of retirement investment solutions will probably end up disappointed.
Annuities are complicated. They have dense contracts, and there are several different types, which can be different to tell the difference between from a distance. But let us break them down for you.
Immediate annuities
An immediate annuity is an insurance product that gives the buyer a guaranteed stream of income in exchange for a lump sum of cash. An insurance company promises to immediately begin making regular income payments to you for a chosen length of time. Immediate annuities have several advantages, such as long-term stability, tax-deferred income, and monthly income payments for the rest of your life.
Fixed annuities
Much like a certificate of deposit, a fixed annuity is a type of annuity contract that allows for the accumulation of capital on a tax-deferred basis. In exchange for a lump sum of capital, a life insurance company credits the annuity account with a guaranteed fixed rate of return while guaranteeing the principal investment.
Variable annuities
A variable annuity is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose.
Fixed index annuities or equity index annuities:
These are basically a combination between fixed and variable annuities. They provide protection of a fixed annuities, while also some of the upside potential of a variable annuity.
There are a few things you should keep in mind before investing in an annuity or recommending one to your clients.
The Cost
Just like a new car, there are many add-on options when it comes to customizing your annuity purchases. And just like with a vehicle, they each come with their own separate cost and can get expensive if you’re not paying close attention.
The Timeline
Annuities are supposed to pay out for a long time, which means don’t put any cash in them that you’ll want in the short-term. Annuities charge expensive penalties for those looking to withdraw early.
The Potential
Fixed and fixed index annuities will not match market growth, while a variable annuity will not protect you from market losses. Be aware of the risks before choosing which type of annuity fits your plans.
Annuities are complicated, but when you take them time to look through them and find where they can plug a whole in your retirement plans, they can be a helpful investment option.
