Trying to decide if an annuity is a good product for you can be a frustrating experience. Annuities can be complicated and difficult to decipher. Although fully understanding them is beyond the scope of this article, we can help by providing a basic understanding of the product.
What is an annuity? It is a contract between you and an insurance company that offers immediate or deferred payments after you make a lump-sum or regular payments into it. Most people purchase annuities to provide regular income after they retire. This income is provided by a group of payees who have been providing regular payments into the annuity. Since some will be deceased earlier than others, the group as a whole provides the assets necessary to supply payments from the annuity.
You have some choices when signing for an annuity. The choice of paying once (lump-sum) or over time was already mentioned. When it comes time for the annuity to pay you, there are choices for receiving payments for a given number of years, or until your death. Keep in mind that the longer the payout time, the lower will be the monthly or quarterly payment.
You also have a choice of annuities, with different provisions:
- Fixed annuity — This is an annuity which pays a guaranteed amount based on your account’s value. These terms are set when you sign for the annuity and do not change in the future. You have no control over how the annuity’s funds are invested, and you have a lower payment amount over time.
- Variable annuity — These annuities have greater risk, but also potentially a greater reward. The payments fund a variety of mutual funds, and your payout is based on the performance of these funds. The risk comes if the market takes a downturn, as your fund can lose value as a result.
- Indexed annuity — These are hybrids of the other two types, with part of the annuity linked to market index funds. The payout can be higher than a fixed annuity, but account fees can be higher and there can be penalties for surrendering early, or closing the account.
There are pros and cons with annuities as with any investments. Some pros of annuities include:
- Peace of mind from having an assured source of income in later life
- Protection from inflation if your annuity is designed with an inflation index
- Less effort than trying to manage your own investment portfolio
The cons of annuities can include:
- Surrender fees if you close the account early, unlike an investment portfolio which can be bought and sold as you wish
- Annual fees which reduce the effective rate of return of the annuity
- Less benefit to any heirs if you pass away early, because your payments will remain with the insurance company
If you are interested in an annuity or have questions about them, contact the Insurance Hub. We have a range of annuities to fit your needs and can help you through the process of getting the best annuity for you.