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What is an Annuity?

An annuity is a long-term, tax-deferred investment designed for retirement that may fluctuate in value. Annuities allow clients to have a retirement income that works for them. The stream of cash flows over periodic intervals for a fixed or contingent period, often for the recipient’s life. Like a traditional life insurance policy, annuity contracts are issued directly by the insurance company (carrier) to the purchasing client. 

Key Features of Annuities

Tax deferral

Principal protection

Guaranteed lifetime income option

Open-ended income instrument

Provides options for ‘annuitization’

Wide variety of choices for client

Death benefit

Avoidance of probate

Why Invest in an Annuity?

Annuities provide a stream of periodic income payments over the annuitant’s life or a set number of years. Annuities can offer a measure of protection against market downturns, may provide a guaranteed investment return, and grow tax-sheltered until the annuitant decides to withdraw the money.  

Who are the Typical Investors in Annuities?

Typical investors of annuities are those looking for a steady stream of income through retirement as well as those individuals seeking financial security in a tax-deferred solution.

What are the Risks of Annuities?

Company Default Risk: The guarantees made by the insurance company are only as good as the claims paying ability of the company itself. The investor should conduct proper due diligence to understand the financial strength of the life insurance company before entering into an agreement. Annuities are not FDIC or NCUA insured, bank guaranteed or guaranteed by any governmental agency.

Early Withdrawal/Liquidity: Fees may apply if you withdraw money before the end of the surrender period. These charges can be quite high and heavily reduce payout. Annuities are designed for retirement purposes and should not be used as ‘emergency funds.’ In addition, withdrawals on an annuity, made before the age of 59 1/2  are subject to a 10% tax penalty.

Interest Rates: Funds invested may not be available to reinvest in a financial product that may later offer a higher rate.

Additional Considerations

Investors should consult with qualified tax, estate, and financial professionals before investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Investment returns and principal value will fluctuate so that the value when redeemed may be worth more or less than the original value. Depending on the type of annuity (i.e. fixed, indexed, variable), you will experience varying degrees of investment risk.