Do I Have To Buy An Annuity?

If you could purchase a product that promised to give you a steady income for life and take the worry out of outliving your assets, would you jump at the chance? While it sounds like an easy decision, this type of product, called an annuity, may not be appropriate for everyone.

What is an annuity?

An annuity is an insurance contract that is typically used to provide a guaranteed income for life. In the world of personal finance, however, “guarantees” usually carry hefty price tags, and annuities are no exception. You should fully understand the pros and cons of these products before you decide whether an annuity is right for your investment portfolio. Additionally, these products are most often sold by a broker who receives a hefty commission for selling these products. Before you buy, it may be in your best interest to consult a fiduciary financial advisor before purchasing an annuity.

What types of annuities are there?

There are two basic types of annuities – immediate and deferred.

  • Immediate annuity – If you need a guaranteed stream of income right away, you can convert a lump sum to an immediate annuity that pays out monthly, quarterly or annually.
  • Deferred annuity – If you are years away from your retirement and want to make sure you have a fixed income coming in every month in your retirement, you can get a deferred annuity. You invest tax deferred money in the annuity to receive payments at a later date. Until you are ready to start receiving the payments your money will grow tax free like your 401k.
  • Each of these annuities can have multiple options – single premium, flexible premium, fixed annuity, variable annuity, life income annuity, joint annuity, and equity-indexed annuity, to name a few.

  • Single premium – You buy an annuity using a lump sum.
  • Flexible premium – You pay multiple premiums to the company.
  • Fixed – Your money will earn a fixed interest rate set by the insurance company. When you begin receiving income, a fixed payment is guaranteed.
  • Variable – Your money will be split into sub-accounts depending on your risk level, and be invested in mutual funds.  The annuity may pay a guaranteed minimum income based on the annuity value and performance, but the downside is it has substantially higher fees than traditional investment vehicles.
  • Equity-Indexed – A variation of a fixed annuity where the interest rate is based on an outside index, such as a stock market index. Like variable annuity this product pays a minimum rate which might go up if the index performs better.
  • Life income – You receive income as long as you live – even if payments exceed the amount of money you put into the annuity. If you buy an installment refund rider your beneficiaries will continue to receive payments even after you die until the total amount paid to you and your beneficiaries equals the premium. If you didn’t buy any rider, the insurance company will keep the money.
  • Joint-life income – This policy is typically purchased by couples, and payments are organized in a similar manner as life-only, except payments will continue until either you or your spouse pass away. Although you will get a lower monthly income than if you purchased a life-only option, the joint-life annuity option ensures that income will continue for the surviving spouse.
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    Author: Travis Esquivel

    Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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