Frequently Asked Questions (FAQ) | Annuities

An annuity is a financial product designed to provide a steady stream of income during retirement. It’s typically purchased from an insurance company and can serve as a supplement to other retirement savings.

Annuities work by accumulating funds over time (the accumulation phase) and then converting them into regular payments (the payout phase). During the payout phase, you receive income either for a fixed period or for life.

There are three main types of annuities:

• Fixed Annuities: These offer a guaranteed interest rate for a specified period. They provide stable, predictable income.
• Variable Annuities: These allow you to invest in mutual funds or other investment options. Returns are tied to market performance.
• Indexed Annuities: These combine features of both fixed and variable annuities. Returns are linked to a specific market index.

Annuities are generally suitable for individuals who want a guaranteed  income stream in retirement, are concerned about outliving their savings, or seek to defer taxes on investment earnings. 

Pros include guaranteed income, tax deferral on earnings, and protection against market downturns (for certain types). Cons include potential high fees, surrender charges, and less liquidity compared to other investments. 

Benefits include guaranteed income for life, tax-deferred growth, potential death benefits, and protection against market downturns.

Risks commonly include potential high fees, limited liquidity, inflation risk, and the possibility of lower returns compared to other investments. The following risks are considered the main risks of annuities.

There are four main type of risks:

• Market Risk: Variable annuities are subject to market fluctuations.
• Interest Rate Risk: Fixed annuities may not keep up with inflation.
• Surrender Charges: Some annuities have penalties if you withdraw funds early.
• Fees and Expenses: Annuities often come with fees, so it’s essential to understand the cost structure.

Fixed annuities do not lose value if held to term, but variable annuities can lose value based on the performance of the underlying investments.

Some annuities offer inflation protection riders, but generally, fixed annuities do not adjust for inflation unless specifically designed to do so.

State insurance guaranty associations provide a level of protection, but limits vary by state. It's crucial to choose a financially strong insurance company.

Payments are calculated based on factors such as the amount of the initial investment, the type of annuity, interest rates, and the chosen payout option.

A life annuity provides payments for the rest of your life, ensuring that you do not outlive your income. 

A period certain annuity pays out for a specific period of time, regardless of whether the annuitant is alive for the entire period. 

A joint and survivor annuity provides payments for the lives of two individuals, typically spouses, ensuring income for both as long as either is alive. . 

Generally, once annuity payments start, they cannot be changed. However, some annuities offer flexibility with optional riders that may allow adjustments.

Interest rates directly impact the payouts of fixed annuities and the growth potential of variable and indexed annuities. Higher interest rates generally lead to higher payouts. 

Market volatility affects the value of the underlying investments in variable annuities, which can lead to fluctuating payouts.

Some annuities offer riders or options that protect against market losses, such as guaranteed minimum income benefits (GMIB).

Recent trends include increased use of indexed annuities, annuities with Long-Term Care benefits, and more flexible withdrawal options. 

Life insurance provides a death benefit to beneficiaries, while an annuity provides a stream of income, often during retirement.

Yes, some products, known as annuity/life insurance hybrids, combine the benefits of both, offering income and a death benefit.

Annuity death benefits provide a payout to beneficiaries if the annuitant dies before the annuity's value is fully paid out.

No, annuities are not covered by FDIC insurance, but state guaranty associations provide a level of protection. 

Longevity insurance, a type of deferred annuity, starts payments at an advanced age and provides protection against outliving your assets.

Financial advisors can help clients understand annuity options, assess  their suitability, and integrate them into a broader financial plan.

Advisors should consider the client's financial goals, risk tolerance, liquidity needs, and the costs and benefits of the annuity. 

Advisors have a duty to act in the best interest of their clients, providing suitable and transparent advice about annuity products. 

Advisors may earn commissions from the sale of annuities, typically paid by the insurance company. The structure can vary based on the product and company.

Best practices include comprehensive client education, clear disclosure of fees and charges, and ongoing review of the annuity's performance and suitability.

Yes, annuities can provide a steady income stream as part of a comprehensive retirement plan. 

A longevity annuity is a type of deferred annuity that begins payments at an advanced age, such as 80 or 85, providing protection against outliving your savings.

Riders are optional benefits that can be added to an annuity for an additional cost, such as guaranteed lifetime withdrawal benefits or long-term care coverage.

Annuitization is the process of converting an annuity’s accumulated value into a stream of periodic payments.

An annuity is a financial product purchased through an insurance  company, while a pension is a retirement plan typically provided by an employer.

Yes, you can sell your annuity through a process called annuity selling, typically to a third party for a lump sum, but it may involve fees and potential loss of future income. 

The treatment depends on the annuity contract. Some annuities offer a death benefit, while others may transfer payments to a beneficiary or cease altogether.

Inflation can erode the purchasing power of fixed annuity payments, but some annuities offer inflation protection features to mitigate this risk.

Yes, annuities can be inherited by designated beneficiaries, who may receive the remaining payments or a lump sum, depending on the contract terms.

Whether annuities are a good investment depends on individual financial goals, risk tolerance, and the specific features of the annuity. They can provide security and guaranteed income, but may not offer the highest returns compared to other investments. 

Most annuities have a “free look” period during which you can cancel without penalties. Be sure to review the terms and conditions.

In the "Contact" section of this website, send us an email or simply give US Annuity Advisor a call. At that time we can discuss options available for you.