Most Commonly Asked Annuity Questions

An Annuity is a financial contract between an individual — the annuitant — and an insurance company — the issuer. It can be structured in  different ways with a variety of custom features, including death benefit payments and inflation protection.

Despite the range of structures, all annuities share a fundamental similarity. They involve an upfront payment by the annuitant in exchange for a series of income distributions from the issuer.

The size, timing, variability and duration of the income distributions depend on how the contract is structured. For many people, this is determined as part of their retirement plan.

There are many different types of annuities. Fundamentally, all annuities work in a similar fashion. An annuity contract entails a lump-sum purchase in exchange for a series of immediate or deferred income distributions. The size, timing, variability and duration of the distributions depend on how the contract is structured, which should be aligned with your investment objectives and tolerance for risk. 

Annuity Rates vary from issuer to issuer, depending on the structure of the contract and the leniency of the issuer. So, an annuity rate is usually reflective of a few key factors, including the current interest rate environment, the life expectancy of the annuitant and the inclusion of customized features, such as inflationary adjustments, lifetime payments and death benefit payments. 

An annuity payout depends on several factors, including the amount of your investment, your age and life expectancy, the structure of the annuity and any features incorporated into the contract. Generally, the younger you are and the longer your life expectancy, the higher the payout you can expect. Additionally, riders generally diminish payouts, given the protections they offer 

3 Benefits Annuities Offer

Tax-deferred growth - Annuities facilitate tax-deferred growth, which can have a powerful compounding effect on your savings. But unlike 401(k) plans and individual retirement accounts, there are no contribution limits for annuities.
Guaranteed stream of income - Annuities provide a guaranteed stream of income, which is invaluable for retirees.
Stability - Annuities offer stability during turbulent economic periods. The downside protection is ideal for conservative investors that are unable to withstand market shocks.

General Overview

1. What is an income annuity?
An income annuity is a financial product sold by insurance companies that provides a guaranteed income stream, typically for life or for a specified period.

2. What are the types of income annuities?

• Immediate Income Annuity (SPIA): Starts payments within 12 months.
   
• Deferred Income Annuity (DIA): Starts payments after a longer waiting period.
   
• Qualified Longevity Annuity Contract (QLAC): A special type of DIA purchased with retirement account funds.
   

3. Who is a good candidate for an income annuity?
Someone nearing or in retirement who wants guaranteed income for life and is concerned about outliving their savings.

Funding & Payouts

1. How do I fund an income annuity?
You can fund it with a lump-sum payment using qualified (IRA, 401(k)) or non-qualified money (after-tax savings).

2. How is the income payment amount determined?
It depends on:

• Age
   
• Gender
   
• Interest rates
   
• Payout option (life-only, joint life, period certain, etc.)
   
• Amount invested
   

3. When do payments start?

• SPIAs: Within 30 days to 12 months.
   
• DIAs/QLACs: Can be deferred for years (up to age 85 with QLAC).

1. What are common payout options?

• Life only 
• Life with period certain (e.g., 10, 20 years) 
• Joint and survivor 
• Cash refund or installment refund 

2. Can income be adjusted for inflation?
Yes, some annuities offer cost-of-living adjustments (COLAs), but payments start lower if this feature is selected.

Security & Guarantees

1. Are income annuities guaranteed?
Yes, by the issuing insurance company. They are backed by the insurer's claims-paying ability.

2. What happens if the insurance company fails?
Most states have guaranty associations that provide limited protection (typically up to $250,000).

Taxes

1. How are income annuity payments taxed?

• Qualified funds: Entire payment is taxed as ordinary income.
   
• Non-qualified funds: A portion is considered return of principal (not taxed), the rest is interest (taxable).
   

Flexibility & Drawbacks

1. Can I access my money after buying an income annuity?
Usually no. Once annuitized, the lump sum is no longer accessible unless you chose a contract with a commutation or cash refund option.

2. What happens if I die early?
It depends on the contract. Some include death benefits or "period certain" features that continue paying to beneficiaries.

3. Can I change my annuity later?
Most income annuities are irrevocable once issued. Carefully consider terms before purchase.

Comparisons & Strategy

1. How does an income annuity compare to a pension?
Similar in structure. An annuity is a private version of a pension you fund yourself.

2. Should I buy one annuity or ladder several?
Many retirees ladder annuities by buying smaller ones over time to take advantage of rising rates and flexibility.

3. How does it compare to a Fixed Indexed Annuity (FIA)?
An income annuity provides guaranteed income now or later. FIAs offer accumulation potential with income riders for future income flexibility.