Annuities are meant to protect consumers against stock market volatility and outliving their money. These features are not readily available in a traditional mutual fund or stock accounts. However, all annuities are not the same. Moreover, this protection is often accompanied by more restrictions, fees, and additional costs, which consumers should be informed about before considering an annuity purchase. Here are 5 little-known facts about annuities.
1. What Is an Annuity–In order to understand how an annuity is structured, a person must understand what an annuity represents. It is a way of converting wealth into an income stream. Individuals who have won legal settlements and lottery winners are among those who might have annuities. An annuity is a financial product sold and administered by insurance companies. It allows a beneficiary to put aside money and have it increase on an annual basis without paying taxes. The insurance company agrees to provide the beneficiary with an income stream based on the terms of the annuity.
2. How Is an Annuity Structured–An annuity can be structured in a variety of ways, but the two most common benefits involve an immediate life-long income stream, which is known as an immediate annuity, in which payments begin right away. The second option involves a delayed payment structure, in which the account balance incurs interest and payments will begin at a determined future date. This is referred to as a deferred annuity.
3. How Is an Annuity Funded–Another little-known fact about annuities is that they can be funded with a single payment/premium or via a series of premium payments. For example, Social Security could be viewed as a form of an annuity. If it was viewed as such, it would be considered a flexible premium, interest-bearing deferred annuity.
4. Insurance Companies Make Money Off Annuities–Insurers who manage these financial products make money off administrative services and fees throughout the life of the annuity. The company is responsible or has partial control over the investment of annuity premiums depending on how the annuity is structured. Moreover, the insurers get to keep any interest incurred beyond the payments they have guaranteed to the beneficiary in the terms of the annuity. Furthermore, the insurance company gets to keep any remaining funds in a contract once the beneficiary is deceased and any remaining payment obligations to their heirs have been settled.
5. Annuities Can Be Fixed or Variable–A fixed annuity is more structured and provides the beneficiary with a fixed series of payments under conditions that are determined when the annuity is purchased. As such, the insurer is guaranteeing to provide the insured with payments specified under the terms of that annuity. This option gives the beneficiary very little control over their money and settlement terms. However, with a variable annuity, the beneficiary has much more control over their money and the terms of their settlement. Variable annuities are designed to allow investors and/or beneficiaries to participate in the structure and investment of their annuity payments/premiums. Moreover, variable annuities still offer the lauded insurance, lifetime income, and tax-deferred benefits of an annuity.
Annuities are meant to protect consumers as well as make their senior years more stable and secure. However, all annuities are not the same, so it is important that beneficiaries are aware of their options before buying into and/or receiving an annuity. Hopefully, this article will inform readers of some little-known facts about annuities. While these financial products offer some much-desired benefits, they are also often accompanied by more restrictions, fees, and additional costs. Therefore, it is important that consumers are informed and aware of their options before considering such a significant, life-altering purchase.
Written and Edited by Leigh Haugh
U.S. News & World Report–15 Things You Need to Know Now About Annuities
Forbes–The ABCs of Annuities: 8 Questions to Ask Before You Buy
LifeHealthPro–7 Facts About Annuities You Should Know
Featured Image Courtesy of WikiMedia Commons – Creative Commons License