What is an Annuity?
Annuities are insurance contracts that make regular payments to you either immediately or at some point in the future. You can purchase an annuity to help grow or protect your retirement savings or to provide you with guaranteed income. Annuities come in a variety of forms. Each type can have unique features that may help you achieve your financial goals whether you’re saving for retirement, approaching retirement, or living in retirement. Our agency offers 3 types of annuities.
An index annuity is an insurance product designed to protect your investment and ensure a retirement income stream. In addition to protection of principal, any interest credited to a fixed index annuity is also protected. As an insurance product, a fixed index annuity is not directly invested in the market. Rather, interest is credited based on the performance of an external index (e.g., S&P 500®).
Contract owners typically have the flexibility to choose among a variety of index-linked crediting strategies, many of which include a cap or participation rate. Once interest is credited, this interest along with the original principle can never decrease due to market volatility. By design, fixed index annuities aim to protect and help grow money over time in order to deliver a stream of reliable income payments when you retire.
Protection from market volatility can be an especially vital benefit for many Americans who are facing their golden years and worry about losing any of their retirement savings. A 2018 Index Annuity Leadership Council (IALC) study found 71 percent of today’s older workforce’s top concern in retirement is principal protection. As part of a comprehensive strategy, a fixed index annuity can go a long way in helping grow and protect those hard-earned dollars and when you are ready a guaranteed income. Along with protection from index decreases, most fixed index annuities also help shield money from annual taxation on interest, as long as funds remain in the annuity. Instead, funds held in an annuity are generally taxed as ordinary income when withdrawn. This allows a nest egg to grow tax-deferred with compounding interest through the accumulation phase, further shoring up resources for when you choose to take an income. *Ask us about how having a “Lifetime Income Rider” with your indexed annuity can guarantee you an income that you cannot outlive! A “Lifetime Income Rider” enables the annuity owner to receive a specified guaranteed lifetime income amount regardless of the annuity’s underlying subaccounts’ performances, “without having to annuitize or give up principal access”.
Fixed or Multi-Year Annuity
Multi-Year Guarantee Annuities (MYGAs), also known as Fixed Rate or CD-type Annuities, are a type of fixed annuity that provides a pre-determined and contractually guaranteed interest rate for a specified period of time, most commonly 3-10 years. For this reason, they are often compared to Bank CD’s except these plans usually earn a higher interest rate and offer tax-deferred growth. Individuals who choose to deposit their money into a principal-protected MYGA can rest assured knowing the exact amount of interest their annuity is going to earn and the exact amount of time their annuity will continue to earn the specified rate. Multi-Year Guarantee Annuities are predictable retirement savings products because the issuing insurance company cannot reduce the interest rate during the guarantee period.
Immediate annuities (sometimes called income or payout annuities) are pretty straightforward – you give the insurance company a lump sum of cash in return for regular income payments until you die. (Actually, you have several options, including payments for a specified period of time – say, 10 or 20 years – or payments that will continue for as long as you or your spouse is alive.) As the name suggests, immediate annuities start paying out right away, so they are frequently used by people already in retirement. A deferred annuity can also be converted into an immediate annuity.