What is an Annuity in Simple Language?

As you plot your course for retirement saving, annuities are one tool that you may consider. An annuity is a financial vehicle that produces a steady income through a contract between you and an insurance company.

After funding an annuity, it then converts into regular payments that grow tax-deferred and accumulate interest over time. Many use annuities as one tool in their retirement plan toolbox to generate one more stream of income.

Annuity Types

There are a few different types of annuities to explore. Each format features different benefits, offering a variety of options depending on your financial and retirement goals. The most common are fixed interest annuities, fixed index annuities and immediate annuities.

Fixed Interest Annuity: This format guarantees a fixed rate of earned interest.

Fixed Index Annuity: This format provides steady income payments based on an underlying stock market index without the risk of traditional investments.

Immediate Annuity: This format is used when a lump-sum payment funds the annuity generating almost-immediate income.

Why Annuities?

There are so many retirement saving options and choosing which route to go can be tricky. With so many options to choose from, let’s examine a few of the main reasons annuities are used in retirement strategies:

• Tax-deferred growth
• Death benefits
• Protection from market downturns
• No contribution limits
• Variety of income options
• Guaranteed income streams

Explore a few other reasons to use annuities on our Bankers Life Annuities page.

Payout Types

Now that we understand what annuities are and their benefits, let’s delve into how to receive income from an annuity with payout options.

Lump Sum: The lump sum payout option allows you to draw one large income payment. It is important to consider tax implications on the growth portion for the larger amount. It is also important to consider interest growth that is potentially being left on the table in this scenario.

Life-Only (Single-Life): The life-only payout option allows income payments to be dispersed as long as the annuity holder is alive. This version typically does not offer a survivor benefit and the payout is calculated based on the prediction of life expectancy.

Joint and Survivor: A joint and survivor payout option guarantees income to the annuity holder as well as a designated survivor as long as they are both living. These payments can be smaller due to the extended period of payouts.

Fixed Period: A fixed period annuity pays income for a specific agreed-upon amount of time. If you pass away before the payout schedule is complete, the payments can go to a designated beneficiary.

Annuity Updates in 2023

One way annuities can be funded is by rolling over retirement assets. This process has typically been managed by an insurance agent to date, however, a new plan by the U.S. Department of Labor is in the works to potentially transition that responsibility to a licensed fiduciary.

This change would ultimately ensure your retirement income is handled with the utmost care and in your best interest. This change could take place some time this year, so keep an eye out for updates.

Annuities are one way you can ensure a steady income in retirement with less risk than a traditional investment. If you are looking for a way to increase your income in retirement, an annuity may be right for you. To take your exploration into annuities even further, take a look at some more information here.

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Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.

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