June is National Annuity Awareness Month
Learn How an Annuity May Make Cents — and Sense
If you’re nearing retirement or actively planning for it, you are probably already aware of annuities and the fact that there are many different kinds that promise to do many different things. Finding the right vehicle for your money is an important part of retirement planning, and annuities are a popular choice for many who hope to retire one day.
What is an Annuity?
Simply put, it’s a contract between you and the company that is selling it. You agree to pay them a certain amount, and they agree to make regular payments, or disbursements, back to you. When the disbursements start — and how long they last — depend on the type of annuity contract. Most annuities are designed to provide a steady stream of income during retirement. They are also designed to disburse more back to you than you originally put in.
To do this, the issuing company takes your payment(s) and invests it. This is why it’s important to do business with a reputable, established company with a proven track record.
An annuity can be customized to fit the specific needs of the recipient, in most cases. For example, depending on the type of annuity, you can make a single lump-sum payment or a series of payments over time to the issuing company. You can also decide when to receive the annuity payout. An immediate annuity begins disbursements shortly after the contract begins, a deferred annuity defers the payout until some time in the future.
Another choice offered by most annuities is the duration of the disbursement payments. You may agree to a specific period of time, 30 years for example, or you may opt to receive disbursements for the rest of your life. The advantage of the lifetime option is that it guarantees income until you die; the advantage to choosing a specific time period option is that it usually results in a larger amount for each disbursement.
All annuities are not created equal. There are three (3) main categories of annuities; the one you choose will depend on how much risk you can tolerate.
- Fixed Annuities offer interest rate crediting, on a tax-deferred basis, along with safety of principal. This means your money will grow at least at a guaranteed minimum rate and that you will never have less than you originally put in. Earnings are taxed as ordinary income only after they are withdrawn or disbursed. One big disadvantage to fixed annuities, relatively speaking, is that the accumulation is generally modest.
- Variable Annuities offer the opportunity for greater returns, but without the guaranteed accumulation. Your accumulation depends on the performance of the subaccount investments associated with your annuity. Variable annuity earnings are also tax-deferred. More risk for (potentially) more reward.
- Indexed Annuities offer the best of both worlds, or at least they try to. They offer the opportunity for greater interest accumulation based, in part, on stock market index linked performance, while also protecting against market declines. Like fixed annuities, there is safety of principal, and earnings are tax-deferred until withdrawn. Indexed annuities can become quite complicated and hard to understand, relative to certain other types of annuities.
Here are a few examples of a few other factors to consider:
- Does the annuity have high fees, charges and/or expenses that eat away at earnings and lower the final disbursement amounts?
- How long is the surrender charge period?
- Is the issuing company stable and financially strong?
Want to Know More? If you’re interested in finding out more about annuities, consult with an insurance professional for an in-depth look at how they work, and which one may be right for you.
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Sagicor Life Insurance Company issues life insurance and annuity products. Policies and riders are not available in all states and state variations may apply. Products have limitations and restrictions including surrender charges, contact Sagicor or a Sagicor agent.
Sagicor does not provide estate planning, legal or tax advice. We suggest you consult an attorney, accountant, or tax advisor.
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Sagicor Life Insurance Company (Home Office: Scottsdale, Arizona).