Variable Annuity Overview from John Hancock. Home. Overview of Variable Annuity. An annuity is a long-term contract between you and your insurance company that provides you with income in retirement.
Can you lose your money in an annuity?
Variable annuities and index-linked annuities both have the potential to lose money to their owners. An instant annuity, fixed annuity, fixed index annuity, deferred income annuity, long-term care annuity, or Medicaid annuity, on the other hand, cannot lose money.
What is an annuity and how does it work?
An annuity is a long-term investment issued by an insurance company that is intended to protect you from outliving your income. Your purchase payments (what you contribute) are turned into recurring payments that can last a lifetime through annuitization.
What are the 4 types of annuities?
Immediate fixed, immediate variable, deferred fixed, and deferred variable annuities are the four primary forms of annuities available to fit your needs. These four options are determined by two key considerations: when you want to begin receiving payments and how you want your annuity to develop.
- When you start getting payments – You can start receiving annuity payments right away after paying the insurer a lump sum (immediate) or you can start receiving monthly payments later (deferred).
- What happens to your annuity investment as it grows Annuities can increase in two ways: through set interest rates or by investing your payments in the stock market (variable).
Immediate Annuities: The Lifetime Guaranteed Option
Calculating how long you’ll live is one of the more difficult aspects of retirement income planning. Immediate annuities are designed to deliver a guaranteed lifetime payout right now.
The disadvantage is that you’re exchanging liquidity for guaranteed income, which means you won’t always have access to the entire lump sum if you need it for an emergency. If, on the other hand, securing lifetime income is your primary goal, a lifetime instant annuity may be the best solution for you.
What makes immediate annuities so enticing is that the fees are built into the payment – you put in a particular amount, and you know precisely how much money you’ll get in the future, for the rest of your life and the life of your spouse.
Deferred Annuities: The Tax-Deferred Option
Deferred annuities offer guaranteed income in the form of a lump sum payout or monthly payments at a later period. You pay the insurer a lump payment or monthly premiums, which are then invested in the growth type you chose – fixed, variable, or index (more on that later). Deferred annuities allow you to increase your money before getting payments, depending on the investment style you choose.
If you want to contribute your retirement income tax-deferred, deferred annuities are a terrific choice. You won’t have to pay taxes on the money until you withdraw it. There are no contribution limits, unlike IRAs and 401(k)s.
Fixed Annuities: The Lower-Risk Option
Fixed annuities are the most straightforward to comprehend. When you commit to a length of guarantee period, the insurance provider guarantees a fixed interest rate on your investment. This interest rate could run anywhere from a year to the entire duration of your guarantee period.
When your contract expires, you have the option to annuitize it, renew it, or transfer the funds to another annuity contract or retirement account.
You will know precisely how much your monthly payments will be because fixed annuities are based on a guaranteed interest rate and your income is not affected by market volatility. However, you will not profit from a future market boom, so it may not keep up with inflation. Fixed annuities are better suited to accumulating income rather than generating income in retirement.
Variable Annuities: The Highest Upside Option
A variable annuity is a sort of tax-deferred annuity contract that allows you to invest in sub-accounts, similar to a 401(k), while also providing a lifetime income guarantee. Your sub-accounts can help you stay up with, and even outperform, inflation over time.
If you’ve already maxed out your Roth IRA or 401(k) contributions and want the security and certainty of guaranteed income, a variable annuity can be a terrific complement to your retirement income plan, allowing you to focus on your goals while knowing you won’t outlive your money.
Why put your money in an annuity?
In retirement, annuities can provide a steady income stream, but if you die too young, you may not get your money’s worth. When compared to mutual funds and other investments, annuities can have hefty fees. You can tailor an annuity to meet your specific needs, but you’ll almost always have to pay more or accept a lesser monthly income.
Long-term contracts
Annuities are long-term contracts that last anywhere from three to twenty years, and they come with penalties if you violate them. Annuities typically allow for penalty-free withdrawals. Penalties will be imposed if an annuitant withdraws more than the permissible amount.
What are the dangers of annuities?
The following are some of the hazards associated with annuities:
- Purchasing power risk refers to the possibility that inflation will outpace the annuity’s specified rate.
- Liquidity risk refers to the possibility of funds being locked up for years with limited access.
Does Suze Orman like annuities?
Suze: Index annuities aren’t my cup of tea. These insurance-backed financial instruments are typically kept for a specified period of time and pay out based on the performance of an index such as the S&P 500.
Do you get your money back at the end of an annuity?
The example is merely a simplified version of the situation. There are numerous choices available with real annuities. Your payments in a variable annuity (as opposed to the fixed annuity in the example) will be determined by actual investment returns. You get payments until you die with a lifetime annuity, but you might not get your entire principle returned. Payments on deferred annuities do not begin immediately once, giving your principle more time to increase. However, the point stays the same: your principal earns interest, and your payments normally contain both principal and profit.
Is an annuity a good idea?
An annuity is a type of retirement income supplement. An annuity may be a useful option for some people since it can provide regular payments, tax benefits, and a potential death benefit.
However, there are certain disadvantages to consider. The most significant of these is the expense of an annuity. While some of the safest alternatives, such as fixed and indexed annuities, have modest costs, variable annuities can be rather expensive because to their higher return potential.
So, the bottom line is that you should not purchase an annuity unless you are certain it is the appropriate decision for you. If you have any specific questions, don’t be hesitant to consult with a financial counselor.
How many years does an annuity last?
A fixed-period annuity, also known as a period-certain annuity, ensures that the annuitant will receive payments for a specific period of time. Ten, fifteen, or twenty years are some of the most prevalent alternatives. (In a fixed-amount annuity, on the other hand, the annuitant chooses an amount that will be paid every month for the rest of his or her life or until the benefits are spent.)
Some plans arrange for the remaining benefits to be paid to a beneficiary specified by the annuitant if the annuitant dies before payments commence. Depending on the plan, this feature applies if the whole period has not yet passed or if there is a balance on the account at the time of death.
However, unless the plan allows for the continuation of benefits, if the annuitant lives beyond the stipulated period or the account is depleted before death, no additional payments are assured. In this situation, payments will be made to the beneficiary until the predetermined period has passed or the account balance has reached zero.
At what age should you buy an annuity?
Starting an annuity at a later age is definitely the greatest option for someone with a relatively healthy lifestyle and strong family genes.
Waiting until later in life assumes that you’re still working or have other sources of income in addition to Social Security, such as a 401(k) plan or a pension.
It’s not a good idea to put allor even mostof your assets into an income annuity because the capital becomes the property of the insurance company once it’s converted to income. As a result, it becomes less liquid.
Also, while a guaranteed income may seem appealing as a form of longevity insurance, it is a fixed income, meaning it will lose purchasing value over time due to inflation. Investing in an income annuity should be part of a larger plan that includes growing assets to help offset inflation over time.
Most financial consultants will tell you that the greatest time to start an income annuity is between the ages of 70 and 75, when the payout is at its highest. Only you can decide when it’s time for a steady, predictable source of money.
