Annuity Fundamentals
Annuity Types at a Glance
| Annuity Type | How It Works | Key Features | Principal Protection | Income Options |
|---|---|---|---|---|
| Immediate | Single lump-sum premium, income starts within 12 months | Guaranteed payments | ✅ | Lifetime or period certain |
| Fixed | Grows at a guaranteed interest rate | Stable, predictable growth | ✅ | Flexible, lifetime or fixed term |
| Fixed Index | Interest linked to a market index (not invested directly) | Growth potential + downside protection | ✅ | Flexible, often includes income riders |
| MYGA | Multi-Year Guaranteed fixed rate for set period | Set interest, like a CD alternative | ✅ | Lump sum or systematic withdrawals |
| Variable | Invests in mutual funds; returns vary with market | Growth potential, investment risk | ❌ | Flexible, with market risk exposure |
Matching Annuities to Retirement Goals
| Goal | Best-Fit Annuity Types |
|---|---|
| Lifetime Income | Immediate, Fixed, Fixed Index |
| Principal Protection | Fixed, Fixed Index, MYGA |
| Growth Potential (with Protection) | Fixed Index |
| CD/Low-Risk Alternative | MYGA, Fixed |
| Legacy/Beneficiary Planning | Fixed, Fixed Index, MYGA |
Before purchasing an annuity, it’s important to understand the fundamentals. Here are the essential annuity basics every buyer should know.
What is an Annuity?
An annuity is a contract with an insurance company, where you make premium payments in exchange for specific guarantees on income, interest rates, or withdrawals. Payments can be made as a single lump sum or in installments over time.
The main purpose of an annuity is to provide reliable retirement income. Except for immediate annuities, most annuities allow your savings to grow tax-deferred until you withdraw funds.
Immediate and Deferred Annuities
Depending on the type of annuity you choose, income payments can begin right away or after a period of accumulation. This defines two primary categories:
- Immediate annuities: Begin income soon after a lump-sum premium—typically within 12 months.
- Deferred annuities: Payments start years after purchase. These have a growth (accumulation) phase before transitioning to income payments.
During the payout phase, you can select from options such as scheduled withdrawals, lifetime income, or a lump-sum cash-out.
Fixed and Variable Annuities
Annuities are also categorized by how interest is earned and risk is managed:
- Fixed annuities: Provide a guaranteed interest rate, with future rates subject to adjustment by the insurer after the initial term.
- Variable annuities: Invest in underlying funds, so growth depends on market performance. These carry investment risk and do not guarantee principal.
Benefits of Annuities
Key benefits vary, but common advantages include:
- Predictable income for life or a set period
- Protection from market losses (fixed/fixed index annuities)
- Tax-deferred savings growth
- Guaranteed minimum interest rates
- Options for lifetime payouts
- Death benefits for beneficiaries
- Potential for index-linked growth (fixed index annuities)
- Customization through income riders
Each annuity contract is unique, so it’s important to review features and terms carefully.
Other Annuity Basics
The five main types of annuities are: immediate, fixed, fixed index, variable, and multi-year guarantee annuities (MYGAs). Most annuities are deferred unless income starts immediately. Payment structures can also differ:
- Single-premium annuities: Funded with a one-time payment.
- Flexible-premium annuities: Allow for multiple contributions over time.
Annuity Death Benefit
Annuities can be included in your estate plan. Some contracts offer a death benefit if the owner dies before income begins—commonly, the greater of the contract value or total premiums paid.
Understanding Annuity Interest Rates
Multiple interest rates can apply to annuities:
- Current rate: The insurer’s credited rate at any time, guaranteed for a specific period.
- Initial rate: Often a temporary promotional rate at contract start.
- Renewal rate: Applies after the initial period, based on market rates and contract terms.
- Minimum guaranteed rate: The lowest possible rate as stated in your contract.
Investment Risks and Interest Calculations
Some annuities offer fixed rates, while others include options tied to index performance or the market. Always understand how interest is calculated and credited in your chosen product.
Action: Always review the surrender schedule in your annuity contract. Understand how long your money is locked in, what fees may apply for early withdrawals, and if any exceptions exist (such as nursing home waivers).
Annuity Charges and Fees
Annuities may include a variety of charges:
- Surrender charges: Penalties for withdrawing during the contract’s surrender period.
- Withdrawal charges: Fees if you exceed free withdrawal limits.
- Contract fees: Flat annual or transaction-based charges.
- Percentage-based charges: Fees calculated from premiums or contract value.
- Premium tax: State-imposed taxes passed through to the contract holder.
Understanding the Free Look Period
Most states require a “free look” period after purchase, giving you time to review your contract and cancel for a full refund if you change your mind. Review your contract for details and time limits.
Final Considerations
With thousands of annuity options, finding the right fit can feel overwhelming. Each contract comes with its own features, benefits, and costs.
If you’re considering an annuity, be sure it matches your long-term goals and retirement needs. Foxcove Financial can help you compare your options and understand how different annuities work in the context of your overall financial strategy.
Looking for Guidance?
If you’re ready to take the next step in planning your retirement with confidence, Foxcove Financial is here to help. We’ll walk you through your options, answer your questions, and help you evaluate solutions that align with your long-term goals. We specialize in insured strategies designed to protect and grow your retirement income. Call us at 609.807.8502 or schedule an appointment.