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Annuity
Indexed annuities are a way to balance risk vs. reward that come with having to choose between variable annuity and a fixed annuity. With an indexed annuity your interest rate won’t drop below a preset amount, and the rate is tied to a specified index, so it can rise higher than a fixed annuity.
Fixed annuities come with a set interest rate that will not vary…up or down. So, any gains that might be available with an indexed annuity will not be available with a fixed annuity.
Variable Annuities come with risk since it is tied to an investment portfolio. That risk comes in the form of a potential decrease in payments…maybe significant.
Whole Life Insurance
Whole life is meant to be permanent and last for the insured person’s whole life. Whole life has a level premium structure and will build cash value over time.
If payments are made in full and on time, these policies guarantee that the cash value will build at least at a certain rate. The cash value will eventually grow to the point a policy owner has a positive return, which makes whole life insurance a form of investment.
Whole life policies also allow for loans to be taken against the cash value of the policy. Since Whole life policies are permanent and life insurance death benefits are tax-free, whole life insurance is often used for estate planning.
Term Life Insurance
Term life insurance is the least expensive type of life insurance. The lower cost makes it appealing. However, Term is not permanent and can be outlived, which means no death benefit would be received if that happens. The beneficiaries will only receive the death benefit if the insured person passes while the coverage is in force. The biggest benefit to Term is it’s much lower cost for typically more coverage for a period of time when that coverage would be most needed (i.e., primary income earner wanting additional death benefit while children are still in the home). Term policies are typically at 10, 15, 20, or 30 years
Universal Life Insurance
Universal life is also permanent. The difference between whole life and universal life is that universal life allows for a flexible premium.
Any amount paid into the policy beyond the cost of insurance is added to a Universal policy’s cash value account. The cash value then grows at a rate determined by the insurance company’s performance and prevailing interest rates, with a guaranteed minimum of 2% annual growth.
The cost of insurance rises over time with a universal life insurance policy, which means a policy is of greatest benefit to an owner when it is well funded in the early years while insurance costs are lowest. As costs rise, the cash value should more than make up for the charges.
A universal life policy can also be surrendered for its cash value and loans/withdrawals can be taken as well.
Frequently Asked Questions
Three biggest advantages to Annuities
- Receive regular payments
An annuity allows you to receive regular payments in retirement to provide guaranteed supplemental income.
- Guaranteed returns
Any contract for a fixed annuity will include certain guarantees to prevent losing money.
- Tax-deferred growth
Any money you contribute to an annuity grows tax-deferred. So, if you contribute money pre-tax, you wouldn’t pay any taxes on that until you begin receiving payments. This allows you to get more money in, which means more growth.
Risk vs. Reward
With the potential of higher returns on your money, comes higher risk. While annuities get a bad rap from those that prefer stock investing, retirement is not a one size fits all. Annuities help balance and diversify your retirement plan and are most definitely a less risky option for those that don’t have the appetite for risk, or are at an age that gambling your retirement in the stock market could leave you with nothing and no time to rebound.
The guaranteed lifetime income offered by annuities means that you can be protected from stock market declines. In addition, annuities secure income to cover your retirement expenses. Annuities are long-term financial security. They provide a guaranteed income in retirement. Annuities are not for those looking to “double their money,” but for those that want to make sure their money remains their money.
Tax-deferred growth
Any money you contribute to an annuity grows tax-deferred. So, if you contribute money pre-tax, you wouldn’t pay any taxes on that until you begin receiving payments. This allows you to get more money in, which means more growth.
What are the main types of annuities?
Indexed Annuity
An indexed annuity is a way to balance risk vs. reward that come with having to choose between variable annuity and a fixed annuity. With an indexed annuity your interest rate won’t drop below a preset amount, and the rate is tied to a specified index, so it can rise higher than a fixed annuity.
Fixed Annuity
A fixed annuity comes with a set interest rate that will not vary…up or down. So, any gains that might be available with an indexed annuity will not be available with a fixed annuity.
Variable Annuity
This option comes with risk since it is tied to an investment portfolio. That risk comes in the form of a potential decrease in payments…maybe significant.
What are my options in receiving annuity payouts?
Immediate Annuity or Income Annuity
With an immediate annuity, or income annuity, you begin receiving payments within a year of setting up your annuity. The most common situations where these are set up is due to receipt of a large inheritance, life insurance policy, or someone pulling money from a more risky option in pursuit of a safer more stable retirement income option.
Deferred Annuity
With a deferred annuity, you receive payments that begin on a set future date, which is typically at retirement. This would be most common if someone received a large amount of money at an earlier age, but wanted to ensure it was going to be there in retirement.
How long will my annuity payout last?
Lifetime Annuities
A lifetime annuity guarantees income for life. The amount of the payment is based on the health and age of the annuity holder. Lifetime annuities can also act like life insurance in that they allow for a beneficiary to be named upon the annuitant’s passing.
Fixed-Period Annuities
With a fixed-period annuity, payments are spread out over a set, fixed period. Typically, 20 or 30 years. Since there is no lifetime guarantee, age and health of the annuity holder do not affect the amount of the payments.
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