Let’s Talk About Annuity Basics

Summer 2022 is a pretty scary time to be planning for retirement. Inflation is high, interest rates are still low, and the market is volatile. If you’re like most people, planning for your future is a worrisome thought.

CDs and savings accounts offer growth far lower than current inflation, and investment accounts expose you to a lot of market risk. So, what should you do?

At Annuity Associates, we believe that annuities offer the best of both worlds. They offer guaranteed income while allowing you to take advantage of market gains.

Here are some of our most commonly asked questions:

What is an Annuity?

An annuity is a contract you make with an insurance company that pays back your invested funds at regular intervals for a set period or over the course of your life. You can purchase an annuity with a lump sum payment or by paying a monthly premium. For retirement planning, you will probably be purchasing an annuity with monthly payments.

Annuities have two phases:

  • The growth phase
  • The annuitization phase

During the growth phase, you are paying regular monthly premiums to the insurance company. The money also grows according to the terms of the contract and where it’s invested. This growth is generally tax-deferred, which makes annuities a great way to accumulate retirement savings.

The annuitization phase is the period of time when you are receiving payments from your contract. These payments are taxed as ordinary income. You generally have a choice regarding when you annuitize. However, the IRS levy tax penalties on those who don’t take out minimum payments after the age 72.

Do Annuities Have Growth Potential?

Annuities grow based on the terms of your contract. A fixed index annuity, for instance, grows based on the performance of a particular stock index such as the S&P 500. Since your principal remains secure, you’re protected from the downside of investing in the stock market.

Variable annuities allow you to capitalize even more on any stock market gains, though you risk losing some of your principal. Annuities may set a loss floor or the maximum amount your annuity can lose in a downturn. You can also offset some of this risk by purchasing an income rider on your annuity.

Wait, What Are Annuity Riders?

Riders are additional provisions added to your main annuity contract to ensure it meets your needs. If you have a variable annuity, you can purchase a guaranteed income or guaranteed death benefit rider to ensure you receive a certain amount of money even in a market downturn.

Other riders can increase or speed up your payouts if you are diagnosed with a terminal condition, offer payments for your long-term care needs, or add a cost of living increase to your payouts.

It’s easy to feel overwhelmed by the variety of riders out there. Because most riders also incur fees, they can eat into your annuity payments. At Annuity Associates, our agents will make sure your contract contains only the riders you need.

What Risks Do Annuities Have?

Though annuities, particularly variable ones, can offer some risk, many allow you to grow your money on a tax-deferred basis and can guarantee you an income for the rest of your life. By placing some of your retirement savings in an annuity, you hedge your risk and make it easier to plan for the future.

I Already Have a 401(K) Or a Pension. Should I Consider An Annuity?

Annuities can help fill in the gaps that many people have in their retirement plans. They can offer stability if you have a 401(K) or other market investments. If you choose a life payout annuity, you’ll be getting payments for the rest of your life, no matter how long you live.

Annuities can also help supplement any income you get from social security or a pension. With the additional income, you can truly enjoy your retirement.

What Does An Annuity Mean For My End-Of-Life Planning?

Whether you are worried about your final expenses or want to leave money behind for your loved ones, annuities are a good option. For instance, you can purchase what’s called a death benefit rider, which gives a lump sum of money to a named beneficiary after your death.

You can also set up your annuity to continue making scheduled payments to your spouse or another designated beneficiary after you die. Because annuity payments typically don’t have to go through probate, this is an easy way to make sure your loved ones are provided for right away. If your annuity passes to your spouse, they will be able to designate a new beneficiary as well.

What About Taxes?

There are two types of annuities, qualified and unqualified. A qualified annuity is purchased with pre-tax dollars, and the earnings are taxed as regular income after you choose to annuitize.

A qualified annuity is purchased with after-tax dollars. Once you annuitize a qualified annuity, you are only taxed on the earnings, not on the principal.

Further tax implications apply if you withdraw more than 10% of your principal when you are under 59 ½ years old. Penalties also apply if you don’t begin getting minimum payments from your contract by the age of 72.

Annuity Associates is not qualified to provide tax advice, so we recommend discussing the implications of any annuity purchase with your tax advisor or attorney.

Who Can Sell Annuities?

Only licensed insurance agents can sell annuities in your state. If you purchase a variable annuity, the agent must also hold a securities license.

At the federal level, annuities are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Annuities: A Solid Option

Annuities can offer stability and peace of mind for anyone thinking seriously about their retirement. They can ensure you’re taken care of and leave something to your loved ones.

If you have additional questions or want to know how to purchase an annuity, contact Annuity Associates to connect to a financial professional in your area. Our free, no-obligation consultation will help you learn about your options for a secure retirement.

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