Annuities can be a powerful financial tool for individuals looking to secure steady income over time. While they are commonly used for retirement planning, they can also be beneficial for those seeking to protect their financial future, whether through long-term savings goals or additional income streams. Understanding how annuities work and the different options available is key to making the right choice for your unique financial needs. At Advisor Insurance Brokers, we’re here to help you understand how annuities work, the different types available and whether they align with your goals.
Understanding Annuities
At its core, an annuity is a contract between you and an insurance company. You make a payment, either all at once or over time and in return, the insurer promises to pay you income in the future. These payments can begin immediately or be deferred until a later date, depending on the type of annuity you choose.
What sets annuities apart is the guarantee of income. This can be especially important if you’re concerned about outliving your retirement savings or want to supplement other income sources like Social Security or a pension. Additionally, annuities allow your money to grow on a tax-deferred basis, meaning you won’t owe taxes on your earnings until you start receiving payments.
Different Types of Annuities
There are several types of annuities, each designed to serve different financial objectives and risk tolerances.
Fixed Annuities
A fixed annuity offers stability and predictability. It pays a guaranteed interest rate over a set period, making it ideal for those who prioritize preservation of principal and want consistent income without market exposure.
Variable Annuities
In contrast, a variable annuity allows your money to be invested in sub-accounts similar to mutual funds. Your returns and future income, are tied to market performance, which introduces risk but also potential for higher growth. These products often include optional features for added security, such as guaranteed lifetime income or death benefits.
Indexed Annuities
A middle ground between the two is the indexed annuity, which links your returns to a stock market index like the S&P 500. You benefit when the market performs well, but your investment is also protected from losses during downturns. These annuities typically offer a minimum guaranteed return, though they may also include caps or participation rates that limit the upside.
Single Premium Immediate Annuities
If you’re looking for immediate income, a single premium immediate annuity (SPIA) begins paying out shortly after you invest a lump sum. This option is attractive for retirees who want to turn a portion of their savings into guaranteed monthly income right away.
Deferred Annuities
On the other hand, a deferred annuity gives your money time to grow before payments begin. These are often used by individuals who are still working or who want to build income for later stages of retirement.
Why Consider an Annuity?
The most compelling reason to invest in an annuity is the guarantee of income it provides. Unlike traditional investments, annuities can deliver payments for a set number of years, or even for the rest of your life. For many retirees, this predictability is a major source of peace of mind.
Another key benefit is tax deferral. Your money grows without immediate tax consequences, allowing you to potentially accumulate more wealth over time. You only pay taxes when you withdraw the funds, and depending on your tax bracket in retirement, this could be advantageous.
Annuities can also play a role in estate planning. Some contracts allow you to pass any remaining funds to your beneficiaries, providing a legacy for loved ones. And if you opt for certain riders or contract features, you may be able to ensure continued income for a surviving spouse or protect against long-term care expenses.
Finally, annuities provide protection from market volatility. While variable annuities do expose you to market risk, fixed and indexed annuities offer safeguards that can help preserve your principal and provide steady returns regardless of how the market performs.
Points to Consider Before Investing
As beneficial as annuities can be, they’re not one-size-fits-all—and there are important considerations to weigh before you commit.
First, understand the costs. Some annuities come with administrative fees, mortality and expense charges or fees for optional riders. While these features can add value, they may also impact your overall return.
Second, consider liquidity. Annuities are generally designed as long-term investments, and accessing your money too soon can result in surrender charges and tax penalties.
Third, keep in mind that annuities can be complex. With so many options and contract terms to consider, it’s important to work with a knowledgeable advisor who can guide you through the details and help you find the right fit for your needs.
Lastly, because annuities are backed by insurance companies, the guarantees are only as reliable as the company issuing the contract. It’s essential to choose a financially strong insurer, something our team at Advisor Insurance Brokers carefully evaluates on your behalf.
How a Broker Can Help You Choose Wisely
Navigating the annuity marketplace on your own can be overwhelming. As independent insurance brokers, we are not tied to one specific carrier, which means we can offer a broad selection of products and truly objective advice.
Brokers take the time to understand your goals, risk tolerance and financial situation. From there, they’ll walk you through the available annuity options, explain the differences and help you weigh the pros and cons. Whether you’re looking to secure guaranteed income, build long-term savings or protect your assets, they can help you structure an annuity that works for your life—not just today, but in the years to come.
Is an Annuity Right for You
Annuities can be a powerful solution for many people, but they’re not for everyone. If you’re approaching retirement and want a reliable income stream that won’t run out, an annuity could be an excellent choice. Similarly, if you’re seeking tax-deferred growth and market protection, certain annuities may align with your goals.
However, it’s important to look at your entire financial picture before making a decision. Consider your other income sources, expected expenses, and whether you’ll need access to the money in the near term. An annuity should complement, not replace, the other components of your retirement strategy.
Get Personalized Guidance from a Trusted Team
At Advisor Insurance Brokers, we’re committed to helping you retire with confidence. We believe in building lasting relationships based on transparency, trust and results. Whether you’re just beginning to explore annuities or ready to incorporate one into your plan, we’re here to answer your questions and provide clear, personalized advice.
Let us help you turn your savings into lasting security. Contact us today to schedule a one-on-one consultation and discover how annuities can support your financial future. Visit our website to contact us today!