Understanding annuities: What they are and what to consider

Planning for retirement income involves weighing many types of financial products, and annuities are one option that some individuals choose to explore. This article is intended to provide general, educational information about annuities—not a recommendation to buy, sell, or hold any specific product.

What is an annuity?

An annuity is a contract issued by an insurance company. In exchange for a lump-sum payment or a series of payments, the issuing company agrees to make payments back to the contract owner, either starting immediately or at a future date. The structure, terms, fees, and features of annuity contracts can vary widely between products and issuers.

Because annuities are contractual products, any income payments, guarantees, or benefits described in a contract are backed solely by the claims-paying ability of the issuing insurance company—not by any bank, by FDIC insurance, or by any government agency.

Common types of annuities

There are several categories of annuities, each with different characteristics:

• Fixed Annuities — Credit interest at a rate set by the issuing company, which may change over time depending on contract terms.

• Variable Annuities — Allow the contract owner to allocate funds among a menu of subaccounts, such as those investing in stocks or bonds. Because the value of these subaccounts fluctuates with market performance, the contract value and any payments derived from it can go up or down, and principal is not protected.

• Indexed Annuities — Credit interest based in part on the performance of a market index, subject to caps, participation rates, or other limits set by the contract. These products do not directly participate in market gains or losses.

• Immediate Annuities — Begin paying out shortly after purchase, typically converting a lump sum into a stream of payments over a set period or for life.

Every annuity type has its own combination of fees, surrender periods, and contractual limitations. These details differ by carrier and by product, so contract-specific disclosures should always be reviewed carefully.

Factors that May warrant reviewing an existing annuity

Annuity contracts are often held for many years, and the terms that applied at the time of purchase may no longer reflect current products, rates, or an individual's circumstances. Some reasons people choose to periodically review an existing annuity contract include:

Contract Performance and Terms Reviewing how a contract has performed relative to its terms—and understanding any caps, participation rates, or crediting formulas that apply—can help a contract owner understand what they actually own.

Changing Personal Circumstances Retirement timelines, income needs, health status, and family situations can change. A contract purchased years or decades ago may or may not still align with an individual's current goals.

Fees and Charges Annuities can carry various charges, including mortality and expense fees, rider fees, administrative fees, and surrender charges for early withdrawals. Understanding what is currently being paid—and what would be owed if changes were made—is an important part of any review.

Beneficiary Designations Life events such as marriage, divorce, births, or deaths in the family may make it appropriate to revisit who is named as a beneficiary on a contract.

Tax Considerations Withdrawals from tax-deferred annuities are generally taxed as ordinary income, and withdrawals taken prior to age 59½ may be subject to an additional 10% IRS penalty, in addition to any applicable surrender charges. Tax rules are complex and specific to each individual's situation.

Questions to consider before making any decision

• What are the surrender charges, and how long is the surrender period?

• What fees apply, and how are they calculated?

• What guarantees exist, and what is the financial strength of the issuing company?

• How would replacing an existing annuity affect fees, surrender charges, or benefits already accrued?

• Does the product's liquidity match the individual's need for access to funds?

These are general questions, and the answers depend entirely on the specific contract and the individual's personal financial situation.

A note on this information

This material is for general educational purposes only and does not constitute investment, tax, or legal advice, nor a recommendation to buy, sell, or hold any specific security or insurance product. Annuities are long-term contracts intended primarily for retirement or other long-term financial goals, and they may not be suitable for every investor. Surrender charges, fees, and other contract terms vary by product and issuer.

Withdrawals of taxable amounts are subject to ordinary income tax, and withdrawals prior to age 59½ may be subject to an additional 10% federal tax penalty. Variable annuities involve investment risk, including possible loss of principal, and are subject to the fees, expenses, and terms outlined in the product prospectus, which should be read carefully before investing.

Guarantees associated with annuity contracts are based on the claims-paying ability of the issuing insurance company and are not guaranteed by any bank or the FDIC.

Individuals considering an annuity purchase, exchange, or review should consult with a qualified financial professional, and where appropriate, a tax or legal advisor, to discuss their specific circumstances before making any decision.