Annuities come in a variety of types, and there are many different ways to structure them depending on your needs. There are three primary categories of annuities. Here is a quick overview of each type.
Keep in mind that, like all investment and savings products, there are fees and costs associated with owning an annuity, and they’re not right for every person or situation. Annuities offer protected lifetime income, but that guarantee is dependent upon the insurance company’s financial strength. Be sure to talk to your financial professional before making any decisions.
When you purchase your annuity, you can also choose when you want to start receiving the income. You can receive payments on a schedule, such as monthly, quarterly or annual payments. You can also purchase an immediate annuity with a lump sum and begin receiving payments within a year of purchase. For retirees, it’s a great way to secure an additional income stream along with Social Security and, if you have one, a pension. If you’re on the younger side, you could choose to purchase a deferred annuity, which grows tax deferred and delays payments for later, after you’ve retired. Deferred annuities can have greater potential for growth, so payments could be larger down the road after they start.
Similar to an IRA or 401(k), the value of an annuity will transfer to your heirs after your death, if you have not begun taking income payments. However, you can also add enhanced death benefits to an annuity, though there may be additional costs. Various index and variable annuities are available with either standard or enhanced death benefit options.
Fixed annuities pay a designated rate of return. They’re designed for people who want to set aside money and draw a fixed amount of income. They provide a high level of predictability along with flexible payment choices, including the option for lifetime income.
Index annuities have a rate of return that’s tied to a market index, like the S&P 500. They’re designed for people who want to take advantage of gains in the stock market with some level of protection against losses. When the index increases, you get a portion of that gain based on what’s specified in your annuity contract. If the index declines, you won’t get a return, but the principal of your annuity won’t be affected, either.
With variable annuities, the earnings are tied to other assets, similar to a mutual fund, and you benefit from any growth or increase. They are designed for people who want to take advantage of both income protection and growth in their retirement savings. People who elect to use variable annuities must be willing to take more risk with their money in exchange for the potential for higher earnings.
The extent to which Protected Lifetime Income is guaranteed will depend upon the claims-paying ability of the insurer that issues the annuity.
Product guarantees are subject to the claims-paying ability of the issuing insurance company. Annuities are long-term products designed for retirement purposes. Partial withdrawals reduce the cash value and certain benefits, such as the death benefit amount. Early withdrawals may be subject to withdrawal charges. Earnings, when withdrawn, are subject to federal and/or state income tax, including a 10% tax penalty for withdrawals before age 59½.
Some income guarantees offered with annuities take the form of optional riders and carry charges in addition to the fees and charges associated with annuity products.
There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Investments in annuity contracts may not be suitable for all investors.
Northern Lights Distributors, LLC, a FINRA/SIPC member, has been retained to facilitate FINRA review of the material in order to meet certain requirements of its business partners. Northern Lights Distributors, LLC is not affiliated with The Alliance for Lifetime Income.
AIG is a founding member of the Board of Directors for the Alliance for Lifetime Income.