What is an Annuity?
In its simplest terms, an annuity is a contract between an individual (or married couple) and a life insurance company. You can purchase an annuity with a portion of your retirement savings in either a single payment or with multiple payments, depending on the type of annuity. Once you own an annuity, any growth in your account may be on a tax-deferred basis while you continue to have control of your money, as needed.
Annuities can be an important part of a diversified retirement portfolio because they can ensure that your retirement income is protected even when there are downturns in the market. So no matter how your other retirement investments perform, annuities can provide you with a source of protected lifetime income that few other financial products can offer.
Why Do I Need an Annuity?
There are many reasons to buy annuities, depending on your lifestyle needs. Among other benefits, they can provide you with guaranteed income for life, a way to provide for your loved ones, protection against losing your initial investment and help with long-term care costs.
In general, there are four major benefits for owning annuities: Premium Protection, Income for Life, Legacy and Long-Term Care.
Premium Protection: This means you will always walk away with your purchase payment no matter what. In other words: You can’t lose the money you started with. Fixed annuities of all stripes guarantee the safety of your initial investment. With fixed-indexed annuities, you have both premium protection when the market is down and the possibility of growing your investment when the market is up. You have upside potential (within certain limits) with no risk of loss.
Income for Life: Many annuities provide the annuitant a stream of guaranteed retirement income for his or her entire life. Depending on the contract, they may also provide income for the annuitant’s spouse for his or her life. That’s known as a joint and survivor option. A lifetime payout annuity may provide payments that are either fixed or variable. Variable payments change based on the performance of an underlying investment portfolio. These come with the potential for greater growth and the risk of loss.
Legacy: Death benefit riders can allow you to pass on your annuity to one or more named beneficiaries when you die. How this will work will depend on the wording of your annuity contract. Your contract may provide for a minimum number of payments for your beneficiaries, for example. It may stipulate the remaining principal be passed on. Funds may be distributed as a lump sum or a stream of payments. With a joint and survivor annuity, your spouse can assume ownership of the annuity when you die under the same terms that you received your payments.
Long Term Care: Long-term care riders are an option in many annuity contracts. They provide a level of insurance against the expenses of long-term care should you need it. The average national cost for a semi-private room in a nursing home was nearly $7,700 a month in 2016, according to the United States Department of Health and Human Services. That’s more than $92,000 a year. Annuities with long-term care riders usually have less stringent medical underwriting than the traditional long-term care policy. If you are able to live independently, you still have access to the annuity for income even if you never need long-term care.
What Are The Most Common Types of Annuities?
There are three basic types of annuities, and we can mix and match the types with different types of life insurance to create new products.
Variable Annuities
Variable annuities have a rate of return which varies based on stock values. This provides a partial solution to the inflation problem of a fixed annuity, but also exposes the ‘investor’ to additional risk. As premiums are paid into the annuity contract, the balance grows and possibly shrinks depending on stock values, and the balance is further reduced to pay for fees.
Index Annuities
One of the most commonly sold annuities, these annuities are hybrids between the fixed and variable annuities and are tied to the growth of a stock index. Premiums paid into the annuity contract are credited with a growth rate based on a complex formula. The rate of return has a fixed minimum amount so you are protected during market downturns.
Fixed Annuities
A fixed annuity offers a set, ‘guaranteed’ interest rate similar to a savings account. As premiums are paid into the annuity contract, the balance grows, but is then reduced to pay for the annual fees the insurance company charges. During retirement, the rate of return and fees continue; and a fixed monthly income stream is provided to the retiree.
What Does No Exam Life Insurance Usually Cost?
The cost of life insurance can average more than $126 per month for a standard 20-year term policy but rates vary depending on term and coverage amount.
Insurers will primarily base your life insurance rate on your health and age. Some additional factors include your weight, whether you smoke, your occupation and even your family health history. Unlike other insurance products, life insurance quotes often do not change based on your state of residence.
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