How Do Annuities Really Work?

| June 14, 2023

An annuity is an investment product that is designed to provide a guaranteed income stream for a predetermined period, often for the rest of one’s life. An annuity is typically purchased from an insurance company, and the purchaser makes regular payments or a lump sum payment to the insurer in exchange for the right to receive a guaranteed income stream in the future.

Annuities can be structured in different ways, and there are several types of annuities available. The most common types of annuities are fixed annuities and variable annuities.

Fixed annuities offer a fixed rate of return on the investment, and the insurance company guarantees a minimum interest rate for a certain period. Variable annuities, on the other hand, allow the purchaser to invest in different investment options, such as mutual funds, and the return on the investment depends on the performance of the selected investments. However, variable annuities have the possibility of losing the principal investment due to investment declines.

Annuities can also be structured to provide income for a specific period, such as 10 or 20 years, or for the rest of one's life. The amount of the income stream is typically determined by several factors, including the amount of the initial investment, the age of the purchaser, and the length of the payment period.

One of the key benefits of annuities is that they provide a guaranteed income stream, which can be particularly appealing for retirees who are looking for a stable source of income to supplement their retirement savings. However, annuities can also be complex and may come with fees and other costs that can affect the overall return on the investment. Also, all guarantees are subject to the claims-paying ability of the insurer. Guarantees apply to minimum income from annuity and do not guarantee an investment return. Lifetime benefits are often an additional rider.

It's important to carefully consider the pros and cons of an annuity before making a purchase, so it might be best to work with a financial professional who can help evaluate the options and determine if an annuity is a good fit for one's financial goals and needs.


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This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products. Insurance policy applications are vetted through an underwriting process set forth by the issuing insurance company. Some applications may not be accepted based upon adverse underwriting results. Death benefit payouts are based upon the claims paying ability of the issuing insurance company. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.