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January 2016  Volume 9, Number 1        
 

Annuities 101

You can buy annuities from a life insurer, but annuities differ from life insurance policies in important ways. In fact, annuities are almost a mirror image of life insurance.

When you buy life insurance, you pay periodic premiums to a life insurer. In exchange, the insurer will pay your beneficiary a lump sum when you die. When you buy annuities, you also pay premiums to an insurer. In exchange, you’ll receive a steady stream of income for a specified period of time, which could be your entire life.

Annuities have two phases: an accumulation phase and a payout phase. The accumulation phase occurs when you pay premiums. You may pay into an annuity for years before “annuitizing” it, or converting it into a stream of income—a deferred annuity. Or you may buy an annuity with a lump sum and begin receiving income immediately—an immediate annuity.

Annuities can also pay in different ways. When you buy a fixed annuity, the insurer typically places your funds in conservative investments. You’ll know what your payouts will be, because the insurer will provide you with a schedule showing what your payments will be depending on when you begin taking them. As the name suggests, payouts under a variable annuity can vary. When you buy a variable annuity, you can choose how to invest a portion of your premium payments. (An insurer will generally provide you with a selection of mutual funds.) In this way, your savings can grow when the market increases. They can also decrease if the market drops. Your eventual payout will depend on the savings you accumulate in the accumulation phase.

Many annuities also offer additional features that you can buy by adding a rider to your annuity. These include inflation protection, provisions that will ensure your heirs will receive at least what you’ve paid into the annuity, and more. For information on tailoring an annuity to your specific circumstances, please contact us.

 

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In this issue:

This Just In...

When to Buy an Annuity…or Not

Wise Choices — Medicare vs. Medicare Advantage

Your Step-by-Step Guide to Personal Financial Planning in Your 40s

Annuities 101

 


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