Annuities

What is an Annuity?

An annuity is a financial product that can be used to accumulate cash value on a tax-deferred basis. Annuities can be a great tool for individuals to secure retirement income or to convert existing assets into a stream of income. There are four main changes everyone faces in retirement—longer life expectancies, taxes, inflation, and market volatility—and annuities help to address all four of these factors.

By accumulating tax-deferred, certain annuities are can grow larger before facing a tax liability. This, along with an interest rate of growth, helps to hedge against inflation. And because many annuities have guaranteed rates of return and are not directly exposure to the stock market, they are less susceptible to market volatility.

Annuity Structure

Most annuities have two phases—an accumulation phase and distribution phase. During the accumulation phase, premium payments are collected and cash value within the policy account grows at a pre-determined rate. Upon a triggering event, it most cases retirement, the annuity then begins to issue benefit payments. With a lifetime income rider, it is possible to receive benefit payments for the remainder of an individual’s life. 

Just as you would find in the life insurance world, there many different types of annuities, all designed to meet different needs. Additionally, the specifics of an annuity will vary amongst the carriers and policy type.

Types of Annuities

While there are numerous versions of annuities, there are a few basic categories.

• Fixed (FA)
• Fixed Indexed (FIA)
• Single Premium Immediate (SPIA)
• Deferred Income Annuities (DIA)
• Variable (VA)

Fixed Annuity

A Fixed Annuity, sometimes referred to as a Traditional Fixed Annuity, provides a guaranteed interest rate as well as an initial interest rate. The actual interest rate may vary over the life of annuity but will not fall below the guaranteed minimum interest rate (GMIR). No matter stock market performance or the overall interest rate environment, the policy will continue to grow at the declared rate. There are Multi-Year Guaranteed Annuities (MYGA) that provide a particular interest rate over longer periods of time.

Fixed Indexed Annuity

A Fixed Indexed Annuity, sometimes referred to as an Equity-Indexed Annuity, gathers interest based on the performance of a specific stock market index, like the Dow Jones Industrial Average or the Standard & Poors 500. Some FIAs include a guaranteed rate of return or floor, securing a base return. While a Fixed Indexed Annuity is tied to the performance of a stock index, it does not directly participate in the markets. Additionally, FIAs are protected against negative index movements. Within FIAs, there will be many interest rates capturing and crediting methods to choose from.

Single Premium Immediate Annuity

Unlike Fixed or Fixed Indexed annuities, which provide tax-deferred growth, Single Premium Immediate Annuities do not have an accumulation or deferral period. Rather, as the name indicates, they are purchased with a lump sum of money. Benefits are then triggered within a year of purchase. The payment amounts you receive from a SPIA will depend on the lump sum used to purchase the contract, your life expectancy, and your gender, and other factors.

Deferred Income Annuity

A Deferred Income Annuity combines elements of Deferred Fixed Annuities and Single Premium Immediate Annuities. Like SPIAs, Deferred Income Annuities are purchased with a lump sum. However, benefits can be delayed for a set period of time, allowing the contract value to grow, increasing the benefit payment amounts upon triggering distribution. In addition, it may be possible to contribute over the initial purchase amount, which can increase benefit payouts. Because DIAs typically have a Lifetime Income Rider built into the product, they are sometimes referred to as “longevity insurance” or a “longevity annuity.”

Variable Annuity

A Variable Annuity shares many features with fixed and fixed indexed annuities. However, they are directly exposed to the stock market through underlying securities of the contract. The carrier guarantees a minimum payment, but the rate of return will vary based on the performance of the underlying securities. Harris & Hobbs Insurance Services does not provide variable product services; rather we focus directly on fixed products with guaranteed returns.

Annuities with Living Benefit Riders

Annuities with living benefit riders are financial products designed to provide retirees with a combination of growth potential and income security. These riders are optional add-ons to annuities and offer specific guarantees to policyholders, even during volatile market conditions. Here’s an overview:

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Types of Living Benefit Riders

1. Guaranteed Lifetime Withdrawal Benefit (GLWB):
   • Guarantees a fixed percentage of your initial investment as annual income for life, even if the account value drops to zero.
   • You can withdraw the guaranteed amount regardless of market performance.
2. Guaranteed Minimum Income Benefit (GMIB):
   • Ensures a minimum level of income once the annuity is annuitized, typically after a waiting period.
   • The income is based on a hypothetical account value, often referred to as the “income base,” which may grow at a guaranteed rate.
3. Guaranteed Minimum Accumulation Benefit (GMAB):
   • Guarantees that your account value will be at least a specified minimum after a set period, regardless of market performance.
   • Commonly used to ensure the return of the initial investment.
4. Guaranteed Minimum Withdrawal Benefit (GMWB):
   • Guarantees a return of principal through withdrawals over time, even if the annuity’s market value falls.

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Key Features of Living Benefit Riders

• Income for Life: These riders often ensure a steady income stream, which can’t be outlived.
• Growth Potential: Your funds remain invested, allowing for market participation while securing a guaranteed income.
• Flexibility: Some riders allow policyholders to stop and restart withdrawals or adjust payout structures.
• Inflation Adjustments: Certain riders include options for income to increase with inflation.

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Advantages

• Market Protection: Guarantees remain intact even if investments perform poorly.
• Predictable Income: Helps with retirement planning by providing stable income.
• Customization: Riders can be tailored to your financial needs and risk tolerance.

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Considerations

1. Cost: Living benefit riders often come with additional fees, reducing your overall returns.
2. Complexity: The terms and calculations (e.g., income base vs. account value) can be complicated to understand.
3. Limited Access: Withdrawals above the guaranteed amount might reduce future benefits.
4. Surrender Charges: Exiting the annuity early could incur penalties.

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Who Should Consider Them?

• Individuals nearing or in retirement who want a balance between growth and income security.
• Those concerned about outliving their savings.
• People seeking income guarantees to hedge against market volatility.

Would you like a deeper dive into specific riders or scenarios where these annuities might fit into a retirement strategy?

Lifetime Income Rider

This is a feature available in some insurance products like annuities and life insurance that provides an income stream that cannot be outlived. Typically a lifetime income rider will involve an additional fee or charge on the premium, but the ability to have a retirement resource that cannot be outlived is attractive to many consumers, especially with longer life expectancies.

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Bear in the mind that the information above is simply a high-level discussion of annuities. To properly address whether an annuity is right for your specific needs or to determine what type of annuity best helps achieve your financial objects, you should consult with a financial professional.

Contact us now with your annuity or planning questions.