Let's Start Simple
Understanding Annuities
Plain Language Explanations for Real Retirement Decisions
The Basics
Understanding Annuities
We’re here to help you in understanding annuities. First, let’s start with a definition. An annuity simply means that you get money on a fixed interval. When it comes to insurance annuities, there are a few different types. These include variable annuities, fixed annuities, and fixed index annuities (FIAs). Each of these products may offer a recurring income payment. However, only fixed annuities and FIAs offer protection of principal. Therefore, those are the types of annuities our firm focuses on. These products are not investments but are, instead, insurance products.
So, what is an annuity? It’s a contract between you and an insurance company. Some annuities may pay out an interest rate when its associated index rises. Others, such as a fixed annuity, remain the same throughout the term of the annuity. In both cases, your principal is not at risk in the stock market. With an FIA, if the market goes up, you may see an increase in your return. But, if the market goes down, you don’t lose.
What is an FIA?
An FIA does not go up and down with the stock market. Instead, it is a contract product that you purchase.
Taxes and Annuities
Earnings in an annuity happen tax-deferred. This means the money grows without paying taxes on it. Only when you take the money out does the income become taxable. Even then, you pay your regular income tax rate. For those who wish to have a tax-deferred income option, an FIA or fixed annuity may be helpful in that way.
Two Steps Explained
The Steps of An Annuity
Step one of an annuity: allow time for your money to accumulate. Step two: begin distribution of lifetime income. Of course, the details of each annuity contract will be different. However, these steps are universal with FIA contracts.
Step 1: Accumulate
To clarify, your annuity has a period of time in which it remains in the account. This allows your money time to grow before you begin taking an income. Fixed index annuities provide a set interest rate to their owners. In addition, FIAs provide a potentially higher rate when the index is up, yet protect your principal when the index is down. In this accumulation phase, your money stays put and has time to grow.
Step 2: Distribute
Distribution is the phase of the annuity when you can begin taking an income. Your payments can now begin. You have some choices as to how you get your money. For example, you can decide if you want an annual or monthly payment. You can even select to receive an income for life. Most annuity products have flexibility and options available. Based on your needs, you may decide to select some of the optional benefits. The distribution phase is when retirees may begin taking their lifetime income.