Annuities : A Guide to a Low-Risk Retirement Plan

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Annuities : A Guide to a Low-Risk Retirement Plan

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It's hard planning out your retirement. Taking a risky investment might fail and compromise your retirement funds. A less risky way of safeguarding your funds is through annuities. Annuities provide you with a guaranteed income that will last throughout your life.  

What is an Annuity?

An annuity is a financial product or contract paid by investors to individuals or company. The payment may come in a period amount of time or one-time huge lump payment . In return, this payment becomes a steady stream of income throughout the investor’s lifetime.

Annuities are managed by financial institutions. They create or sell the annuities. The financial institution also accepts and invest funds from individuals. During annuitization, they release a stream of payments at a given point of time.

Annuities are usually provided by life insurance companies and investment companies. Annuities began in the 1800s. Life insurance companies offers individuals periodic payments. It’s usually throughout the individual’s lifetime in exchange for a lump sum of money.

Further Reading:

Annuity Types

Annuities can be categorized into different types of contracts or financial products. In general, annuities are fixed or variable. Fixed annuity is a stable periodic flow of income for investors. Variable Annuity is highly dependent on how the annuity fund is doing well. You could get a bigger income if it’s doing great or a smaller income if it’s doing poorly.

  • Fixed Annuities - Under fixed annuity are also different classifications of annuities.
    1. Immediate Annuities work by contributing a huge lump of sum. You will then immediately start to receive a regular stream of income. The amount depends on the annuity package of your choice. The amount will remain unchanged for the rest of your life. This type of annuity is usually chosen when you suddenly gain a huge sum of money like lottery winnings or an inheritance.
    2. ​Deferred Annuities are catered generally to the working class. It’s a periodic contribution throughout your working life in order to build a huge capital. This capital is then made into a regular stream of income when you retire. The contribution you make is also tax-sheltered until it is converted to an income.
  • ​Variable Annuities provide investment accounts. They are called “subaccounts”. It’s similar to a mutual fund. The payment grows depending on the performance of the annuity investment. This type of annuity has become really popular for its low risk and high reward. The insurance company guarantees you a minimum stream of income. This income increases depending on how well the annuity investment is doing. Variable annuity gives you a guaranteed stream of income and at the same time have a chance of growth in your investment. Hence, it’s popularity.
  • Indexed Annuity or Equity-Index Annuity is a contract. This contract is between you and an insurance company. You can pay a one-time payment or a regular stream of payment. Indexed annuity is almost the same as a variable annuity. The difference is how the income is dictated. The income of this payment is calculated based on a certain index. This index can be the S&P 500, Dow Jones, and other indexes depending on the insurance company.

Further Reading :

How Annuities Work

It is important to know how things work before you invest in it. We’ll discuss the phases of annuity contract, payment methods, and payout methods.

  • Phases Of Annuity Contract - A typical annuity contract consists of three phases. They are accumulation, annuitization, and payout phase. Do take note that not all annuity follows this phase. But this is the most common phases that annuities follow.
    1. Accumulation Phase is always the first phase of an annuity contract. It starts with the beginning of payment . This phase is where you pay the financial institution to grow your investment. The more you pay your annuity, the more your income goes up.
    2. Annuitization Phase is the starting point when the financial institution begins paying back the investors. Once an annuity is in this phase, it is irreversible. It will provide a constant income to the investor until death or as indicated in the contract. The mode of payment is chosen by the investor within the contract. This is also unchangeable.
    3. Payout Phase is the final phase of the annuity. This is the period where payment returns are made to the investors. This is usually given on a monthly basis throughout your lifetime. Majority of annuity requires a minimum age to start this phase. The income generated is also taxed.
  • Payment Methods - There are many ways annuity contracts are funded. Majority of this falls into three methods of payment. These are:
    1. Single Premium - is a single lump of sum payment. It fully pays the annuity contract. This method of payment usually happens when an individual suddenly gains a fortune. Examples of this fortune is lottery winnings and inheritance.
    2. Fixed Premium - a systematic way for building annuity funds. Payment is made on a regular basis until the annuity contract is fully funded.  Usually this payments are made monthly. Others could be annually and different time depending on the contract agreement.
    3. Flexible Premium - a method of payment where the investor chooses when they pay within a certain minimum amount. This method of payment can also be shifted to a systematic investment. They are also free to amend the terms of contract granted that the funds has exceeded the minimum investment requirement.
  • Payout Methods - There are different methods to choose for payout. This is usually specified on the annuitization contract.
    1. Straight Life - The contract pays you out until the end of your life. Even if your life span exceeded the value of the contract. Remaining funds on the annuity contract goes to the insurance company upon the investor’s death. This method has the highest payout potential. It also is the riskiest to lose all investment upon death.
    2. Cash Refund Annuity - The investor is given income for life. Upon death, any funds left in the annuity contract is given to the beneficiary. The initial payout of this method is lower because of the refund.
    3. Life Income with Period Certain - The investor is provided an income for life. The income lasts only for a certain period even if the investor dies. If the investor dies not reaching the end of the certain period, the beneficiary will inherit the income. The initial payment is also lower compared to a straight life payout method.
    4. Joint Life - This is the same as the straight life payout method. The difference is joint life has two investors instead of one. The income flows so long as both of them are alive. Once one of them dies, the flow of income also stops. This is really unpopular because of this condition.
    5. Joint Survivor Life - This is the same as Joint Life. The change is that income will continue to flow as long as one of the investors is still living. The income is also passed on to the beneficiary upon the death of both investors. It is really popular but has a lower payout compared to Joint Life.
    6. Period Certain - The simplest method of payout. The income flows for a certain period of time. It stops when the annuity fund is depleted.
    7. Joint Survivor Life with Period Certain - A mix of Joint Life and Joint survivor life. The income flows until both of the investors are dead. If the second investor died within the period certain, the income is transferred to the beneficiary. It will stop until the end of the period certain. Because of the guarantees within the income stream, this has the lowest payout among all methods.
    8. Fixed Amount - This is also a very simple method. The investor receives a fixed income stream. It ends when the annuity fund is depleted. If the investor dies before the fund is depleted, the beneficiary receives the remaining funds.
    9. Interest Income Only - This is more of like a withdrawal. The investor receives all or part of the gains from the annuity funds. The base of the fund is not withdrawn in order to produce more gains.

Further Reading :

The Benefits of an Annuity and Why People Buy Them

If you are looking for really huge return in your investment, annuities are not for you. Annuities provide you with a good stable income until your death. It’s a good investment for people who are nearing retirement.

Why do people invest in annuities? Here are some reasons why:

  • Low Risk Tolerance - Seeing losses in your investment is not a good thing. But with fixed annuity, it is guaranteed that you won’t incur losses in your investment. Variable annuities may incur losses. However, there are options for you to add to potentially offset losses. One example of this is the guaranteed minimum income stream.
  • Lifelong Income - Most annuities are lifetime. This is why it’s popular because it guarantees an income until your death. Even better is that there are options that still gives you income even if your annuity fund is depleted. The longer you live the better you gain from annuity.
  • Tax Benefits - You don’t pay taxes on annuity until you withdraw from it. This only applies to non-qualifying annuity investments. Annuities under IRA or other retirement plans fall under a different section of the tax code. Do note that pulling money from an annuity is taxed at the ordinary income tax rates. If all the gains are withdrawn, your base fund is tax-free. You should consider annuity if you have maxed out your retirement plans and you’re in the 25% tax bracket. If you are however below the age of 59 and a half, your income will be taxable. It will also incur a 10% penalty.

Further Reading :

Annuity Rates

You should know that annuity rates differ from different types of annuities. When comparing annuity rates among companies you should take note of what annuity types they are offering. Also there are different definitions of the rate. Rate in annuity usually does not mean rate of return.

A big factor for calculating rate of return will be life expectancy. A long life expectancy would yield a greater increase in return compared to a short one. This should be taken into account when investing in immediate annuity. Do take note that this mostly applies to immediate annuity. Immediate annuity usually does not include a beneficiary. That’s why calculating your life expectancy should help you predict if you will gain or lose in the annuity investment.

You can check out certain websites that shows monthly updates on annuity rates and annuity calculators. We’ll provide you with links to those sites on further reading

Further Reading:

Reviews on Annuity Companies

We’ve checked out some of the notable annuity companies. We looked into some of the products they are offering and the presentation of their products on their websites. 

Fidelity Investments

BBB Rating : C- and not accredited by BBB

Consumer Affairs: 4 stars with 103 reviews

Year Started: 1946

Address :  900 Salem Street, Smithfield, RI 02917

Contact : 1 877 962-1133

Website : https://www.fidelity.com

Annuity Products offered : (click here for the website list)

  • Fidelity Personal Retirement Annuity
  • Deferred Fixed Annuities
  • Deferred Income Annuities
  • New York Life Clear Income Fixed Annuity
  • Immediate Fixed Income Annuities

We love how Fidelity presents their annuity products on their site. It gives a brief explanation of the product. The site displays the minimum investment required, fees, and the highlights of the product. When you click on the product, it even shows more information. It tells you who this product is appropriate for. It also provides details of the product’s feature, investment options, and annual fees.

Fidelity also provides customers with planning and advice. Their prices are also transparent so you are sure that there will be no hidden fees. They also provide investing tools and insights from professionals.

On the customers’ side, we have varying mixed customer reviews. Most of the complaints were addressed to Fidelity’s service. However most of the positive reviews are also about service. The problem lies with the sales agent that they are being tended to. Make sure you are tended by a competent and courteous sales agent.   

Mass Mutual

BBB Rating : A- and not accredited by BBB

Consumer Affairs: 3.2 stars with 32 reviews

Year Started: 1851

Address :  1295 State St. Springfield, MA 01111-0001

Contact : 1-800-272-2216

Website : https://www.massmutual.com

Products Offered : (click here for the website list)

  • Deferred Fixed Annuity
  • Variable Annuity
  • Fixed Index Annuity
  • Immediate Income Annuity
  • Deferred Income Annuity

The product showcase of MassMutual on their site is quite simple. It only features the highlights and what it focuses on. It also shows a checklist of death benefit protection and lifetime income option for the products. These may be difficult to comprehend for first time buyers of annuity. Upon clicking on the product, it will give you details on how the product works. It also shows some of the features and advantages of the product.

MassMutual lets you contact their advisors to learn more. They also provide information such as product/fund performance for policy holders. The overall presentation of their website does not look friendly to investors who knows little to none about annuities.

The customer feedback on BBB and ConsumerAffairs are fairly balanced. Most complaints were centered around Products and Services. Expect to have a fairly long processing service as is most customers complain about.

AIG

BBB Rating : A- and not accredited by BBB

Consumer Affairs: 2.5 stars with 177 reviews

Year Started: 1967

Address :  180 Maiden Lane New York, NY 10038

Contact : Have different numbers for different purposes (see website contact us)

Website : https://www.aig.com

Products Offered : (click here for the website list)

  • Variable Annuities
  • Index Annuities
  • Fixed Annuities
  • Immediate and Deferred Income Annuities

AIG’s website display of annuity products is very simple. Just a brief description of how the product works. When clicking on a certain product type, you will be shown more products under that product type. For example under Index Annuities there are three different products. They are Power Index Plus Annuity, Power Index Plus Income Annuity, and AG Choice Index Annuity. Upon clicking a product, it shows what the product is and how it works. It also showcases the benefits of buying the product.

AIG does not provide any financial professional to help you with. It may discourage you especially if you are not that knowledgeable on annuities. Even the way their website is presented through simple terms. It assumes that website visitor should already have knowledge regarding annuities. Fees for products are also not shown on the website.

Customer feedback is highly on the negative side. Most complaints are about products, services, billing and collection. If you want to try out this company, you should know and be clear of the conditions, fees, details within the product your buying to avoid discomfort.

Prudential Annuities

BBB Rating : Not rated and not accredited by BBB

Consumer Affairs: 3.7 stars with 64 reviews

Year Started: 1875

Address :  One Corporate Drive, Shelton, CT 06484

Contact : 1-888-778-2888

Website : http://www.annuities.prudential.com

Products Offered : (click here for the website list)

  • Highest Daily Lifetime Income
  • Defined Income
  • Premier Investment

Prudential Annuities only focuses on variable annuities. When checking out their product information, it gives out a brief description of the product. It also shows details of the product and providing information if the product is compatible with your needs. Upon clicking a product, it shows you details of the product, what it provides, and annuity options. It also provides information about annuity and income gained in annuity.

Prudential Annuity helps you find a financial advisor. Their website also shows the products prices, performance, rates, and investment options. The website is made simple to look at.

Most customer feedback complaints are about Products and Services. If you want to try out this company or any other for that matter, always know what you’re buying into. Know what the product offers and what it does not.

American Equity

BBB Rating : A+ and accredited by BBB

Consumer Affairs: 2.7 stars with 34 reviews

Year Started: 1995

Address :  6000 Westown Parkway West Des Moines, IA 50266

Contact : (888) 221-1234

Website : https://www.american-equity.com

Products Offered : (click here for the website list)

  • Fixed Index Annuities
  • Traditional Fixed Annuities
  • Immediate Annuities

Their showcase of annuity products is very simple. You are shown a video about annuity and  short details of the types of annuities they are offering. Upon clicking the type of annuity you want, you’re redirected to another page. It contains a brief description of the annuity type. It also contains the common indexes they are using. Products for annuity types are shown. When clicked you are shown a pdf file of a brochure about the product. It contains details of the product. Such as potential income, benefits, and investment options.

Customer feedback is also the same with other companies so be careful when buying a product. Know the fees, options and benefits.

Conclusion

Always remember that annuities are not built for large paying income. It’s a low-risk investment that guarantees a lifelong stream of income. Different types of annuities provide you with different benefits and range of income. Payouts are also have different methods and ways of implementing the payout.

When buying annuity products, always know what your buying into. Ask yourself what is the product? It’s options? It’s features? It’s fees? When does the payout start? How long the payout lasts? Knowing everything about the product your buying into will help avoid problems in the future. Especially  when you’re starting near retirement.

Annuity is a very good retirement investment for its guaranteed lifelong income. It’s a good setup for you to have and enjoy a good long retirement life.

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