Annuities were originally invented by the insurance industry to protect against superannuation, which is when someone outlives their income stream. They are, essentially, reverse life insurance policies. Life insurance provides income after the policy holder has died. Annuities provide steady income while they are still alive.
Understanding Annuities: The Phases
The lifecycle of an annuity exists in three phases: the accumulation phase, the annuization phase and the payout phase. Accumulation is when the annuity builds value prior to the point in the contract when the first payout is scheduled. The second phase is the point in the contract when the issuer must begin making scheduled payments. During this phase, all accumulation credits are converted into payout units. Finally, the payout phase is a period of time – which could be short, extended or anything in between – when the investor receives payments.
Choose the Right Annuity – You Don’t Get a Do-Over
As discussed in the article “Why it’s So Important to Know the Annuity You’re Buying,” it is crucial to research before you buy – not all annuities are created equal! When you buy an annuity, you are locked into it and committed for the annuity’s life – as well as yours. Annuities are legally binding contracts that generally live as long as the purchaser. Your decision will depend upon your age, whether or not you are already retired, and, of course, your goals and plans.
Choose the Right Payout Structure
Are you married? Your relationships factor heavily in to the kind of payout you will want. Single-life annuities, for example, are attractive because they offer the largest annual payouts – but they stop paying whenever the purchaser dies. Joint-life annuities, on the other hand, do not come with yearly payouts that are quite as generous, but the surviving spouse still receives payments after the purchaser dies.
There are also several different ways to fund your annuity.
- Single Premium: This is one lump payment that satisfies the contract.
- Fixed Premium: A systematic payment structure in which the owner has to make equal payments until the contract is paid.
- Flexible premium: Allows owners to make payments whenever they want in whatever increments they choose.
Annuities are a long commitment – research before you commit!
Annuities can provide a predictable, reliable source of income that can supplement a retirement income, support a surviving spouse, or provide complementary income for Social Security. The trick is to know exactly how you want to pay in, and exactly how you want to be paid out. Do your research first – annuities are lifelong commitments!