Annuities

Annuities are an insurance contract that allows the owner to exchange a sum of money for a guaranteed income stream for a specific period of time. They allow someone to shift the risk of running out of money during retirement from themselves to the insurance company. Many annuities allow the owner to start saving early and adjust the amount they save as they see fit. They provide a valuable savings vehicle with the potential for guaranteed interest or market-based growth. 

One of the key advantages that annuities offer over other types of savings and investing options is their ability to become a guaranteed income stream that cannot be outlived. The income stream may extend up to and including the life of the owner, or potentially the owner and another person. 

Annuities also offer benefits and features that may facilitate the consumers ability to diversify their portfolio, limit risks, and reduce taxation during their working years. 

Fixed vs. Variable Annuities

There are two main types of annuities: fixed and variable. One of the key differences between them is the level of risk, of loss or gain, the owner takes.

Fixed Annuity: There is a guaranteed return of invested dollars and a minimum rate of interest. The risk with a fixed annuity isn't that you will lose the money invested into the account, but that the account won't grow enough. These types of annuities are generally more appropriate for savers that want to avoid market swings or need to maintain their account value. 

Variable Annuity*: Since the investments are market-based and can gain or lose value, there is not a guaranteed return or rate of return of the money invested. However, based on historic market performance over long periods of time, these types of investments have a significantly higher growth potential. These types of annuities are generally more appropriate for savers who have more time before income is needed, and those who understand and are willing to accept market-based investment valuation changes.

 

Compare the Differences

 

Fixed Annuities:

  • Little to no risk, but low growth potential
  • Interest guarantees
  • Safety of principal
  • Flexible payout options
  • Low cost - minimal or no fees

Variable Annuities:

  • Risk of loss, but high growth potential
  • Market-based performance
  • Death benefit - guaranteed return of principal if owner dies prior to annuitization
  • Flexible payout options
  • Higher fees and expenses