Offered primarily by insurance companies (but sometimes sold on their behalf by brokers or advisers), annuities come in a variety of forms, purposes, and costs. Some are designed solely to provide a steady income, while others are more like investment instruments and can be significantly more complex.
Simple Annuity
The most basic type of annuity is income annuity: you pay a lump sum to a life insurance company, and it pays you a fixed amount every month for the rest of your life, no matter how long you live. The most common type of income annuity is immediate annuity, where payments begin right away.
Payout amounts depend primarily on age, gender, and the interest rate at the time the annuity is purchased.
A 65-year-old man that invests $100,000 in an immediate annuity in February 2024 might receive about $621 per month for life ($7,452 per year).
A 65-year-old woman might receive about $600 per month ($7,200 per year).
Deferred earning annuity
This product involves investing funds with deferred payments. One perk is that payments will be much larger. For example, if a 65-year-old man invests his $100,000 in a deferred income annuity that begins payments at age 75, he will be receiving $1,401 per month for the rest of his life. Caution: if he passes before then, he and his family will get nothing.
You can choose a deferred income annuity, which guarantees that you or your heirs will receive at least the amount you originally invested in exchange for lower payments ($1,237 per month).
Free annuity
Some annuities allow you to withdraw money. However, if you withdraw more than a certain amount in the early years, you may have to pay an early withdrawal penalty and you may lose some of the guarantees. Some of these annuities are more like tax-advantaged investment instruments than a way to earn guaranteed retirement return.
For instance, fixed-rate annuities offer a guaranteed interest rate for a definite period, such as five years. Taxes on return are deferred until retirement.
Variable annuities allow invest in mutual fund-like accounts and defer taxes.
Index annuities allow you to earn interest on share index growth. For example, if S&P 500 goes up 5%, you get 5%; if it goes up 10-20%, you get 7%. However, if the index goes down, you don’t lose anything.
Reducing risk increases the cost of annuity
When you try to minimize the risks associated with annuity, insurance companies must consider those risks when calculating the cost of annuity. The greater the level of risk coverage (such as guarantees on return or health benefits), the more expenses and reserves the company must have to ensure that those obligations are met. These extra costs are factored into the cost of annuity making it more expensive.
In general, the more coverage there is against various risks and volatility, the higher the cost of the annuity because the insurance company takes on more financial obligations and risks.
Choosing a life insurance company
Monthly payments on income annuities can vary significantly from company to company. If you purchase an annuity through a broker or advisor, it is important to work with one who has multiple insurers and can offer you the best rates for your age and payment type. There are also comparison sites that provide price quotations by multiple insurers for immediate and deferred annuities.
Source: https://www.aarp.org/retirement/retirement-savings/info-2020/learn-about-annuities.html
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