Security for an uncertain future: A guide to annuities

Security for an uncertain future: A guide to annuities<

Annuities offer senior citizens and other long-term financial planners a chance to collect regular payments -- sometimes for the remainder of their lives.

An annuity is essentially a contract with an insurer. You pay a premium (or several premiums) upfront in exchange for the promise of a return on your investment over time. Whether you make a single lump-sum payment or multiple payments, the insurer has an obligation to return money to you at fixed future dates, according to the U.S. Securities and Exchange Commission.

The mechanisms of annuities can get complicated, but there are three basic kinds of arrangements:

  • Fixed: According to the National Association of Insurance Commissioners (NAIC), a fixed annuity earns interest at the rates set by your contract.
  • Variable: A variable annuity generally involves more risk, but it has potential for greater rewards. The insurance company invests premiums in bonds, stocks or mutual funds. If these investments do well, you may get a better payout. If they don't, you could lose your investment, according to NAIC.
  • Indexed: One way to split the difference is to invest in equity-indexed annuities. This ties your annuity to an index, like the S&P 500. You are guaranteed a base return, but you may get even more if your index increases over the term of the annuity.

Some annuities are "single premium" -- that is, you pay one lump sum to an insurer. Others involve several premiums, meaning you pay over time.

Some annuities are called "immediate" annuities. Actually, the word "immediate" is somewhat misleading, as you may have to wait up to a year to start receiving income payments. Other arrangements are "deferred," meaning you'll receive payments years later.

Choosing the right annuity

Annuities can be useful for people planning for retirement. According to the Insurance Information Institute, annuities can help diversify your investments, prevent you from outliving your assets and protect your assets from creditors. In general, annuities are for long-term goals, not short-term financial fixes.

According to NAIC, factors that should influence your decision include:

  • When you need or want payments.
  • How much you can afford to invest in premiums.
  • How easy will it be to gain access to your income.
  • What penalties and fees apply if you withdraw funds early.
  • How much money you will collect from Social Security, pensions and other investments.
  • How much supplementary income you will need to pay for others, like dependent children or a spouse.

Protecting yourself when shopping for annuities

Purchase products only from licensed companies and agents. You can check out a company's credit rating through agencies like Moody's, A.M. Best and Standard & Poor's. Your company and agent should be licensed in your state.

NAIC warns consumers to look out for the following red flags:

  • High-pressure sales pitches.
  • Salespeople who urge you to sign up quickly.
  • Agents who hesitate to show credentials.
  • Offers that are "too good to be true."
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