If you’re having conversations about your retirement, chances are high that you’ve at least heard of annuities. These financial tools are offered by life insurance companies to help solve a variety of financial needs and provide guaranteed income in retirement. Annuities can be complicated—and there are different types to choose from—but here are some of the basics to know.

1. What’s an annuity?

An annuity is a contract between you and the insurance company. In exchange for your purchase payment, the insurance company helps grow and protect your money (though some annuities have the potential for loss), then pays your money back in a lump sum or as “income” through regular payments over time. Your annuity income can last for a specific number of years or the rest of your life.

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For those seeking growth for their savings and guaranteed income in retirement, annuities may be a solid addition to a broader financial strategy.


2. How do annuities work?

There are two general types of annuities. They work differently, but the end goal is similar.

  • With immediate annuities (also called “income annuities”), the insurer converts your purchase payment into an immediate, guaranteed income stream that can last for a specific amount of time or the rest of your life.
  • With deferred annuities, the insurer holds your purchase payment for a period of years to allow it to grow (via interest rates, index-based formulas or other options). At the end of that period, the insurer returns your potentially higher annuity value in either a lump-sum or as guaranteed payments over time.

3. Why would I buy an annuity?

Like Social Security, annuities can provide guaranteed income for the rest of your life. Annuities also grow tax-deferred, meaning any growth is not taxed until you begin taking income from them. You might be in a lower tax bracket at that time, so you’ll pay less on what you’ve earned. And finally, many types of annuities provide either guaranteed growth of your purchase payment or at least protection from any type of loss. (Some annuities base their growth on mutual fund performance, so there is potential for loss in value.)

4. What do annuities cost?

Aside from your purchase payment, many annuities have few or no ongoing fees. But that doesn’t mean there are no expenses to be aware of. First, consider how much money you can afford to set aside in an annuity for its initial term. If your needs change and you need to withdraw more than an allowable amount during the annuity’s growth period, you could pay “surrender charges” on the amount you withdraw. Some—but not all— annuities also have annual fees and rider charges that can limit your growth potential. Make sure you discuss all fees and charges with your financial professional before you buy.

5. What happens to my money if I die?

Most annuities today have “death benefit” provisions that pass the funds in your annuity to your beneficiaries when you die—or beneficiaries can continue to receive annuity payments if they have started. Make sure you understand the provisions of your specific annuity before you purchase it.

6. Are annuities safe?

Annuities are guaranteed by the providing life insurance company. That’s why it’s important to choose a reputable provider with strong financial ratings. These ratings are independently provided by companies such as A.M. Best, Moody’s and Standard & Poor’s, and they are publicly available. Research your provider before you buy, or ask a financial professional for suggestions.

Are annuities right for you?

Annuities aren’t for everyone, and there may be disadvantages for some consumers. But for those seeking growth for their savings and guaranteed income in retirement, they may be a solid addition to a broader financial strategy. Talk to a financial professional to learn more.