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Types of Annuities Explained: Evaluating Your Retirement Income Options

Although many people carefully calculate the amount of money they’ll need to live comfortably in retirement and spend their working years saving for that goal, some still fear not having enough. In fact, due to increasing life expectancies, 60% of Americans are concerned they may outlive their assets.

This fear casts an even larger shadow on respondents already in or near retirement. While running out of money is a possibility, certain types of annuities can provide a steady retirement income stream to assuage these fears.

What Is an Annuity?

An annuity is a contract between you and an insurance company that you can purchase by paying a lump sum or monthly premium. After the accumulation period, the issuer provides a stream of payments for the rest of your life or your chosen period.

Annuities can be a dynamic vehicle to include in your retirement income mix, especially if you’re concerned about running out of money. However, different types of annuities—fixed, variable, fixed index, and immediate—have distinct characteristics, pros, and cons that may be more or less suitable for your retirement lifestyle.

Fixed Annuities

A fixed annuity is the most straightforward type, offering a reliable and predictable income stream. The insurance company guarantees a fixed interest rate on your premium, which generates a steady income stream over the rest of your life or a specific period.

Like certificates of deposit, these annuities are often the go-to solution for more risk-averse investors and are among the safest investment options for retirement portfolios.

Pros

Dependable Monthly Income

Fixed annuities provide a fixed interest rate and guaranteed minimum payout.

Principal Protection

Your principal investment remains intact and can be passed on to loved ones after death.

Cons

No Inflation Protection

Inflation is a normal part of economic cycles. Typical fixed annuities may lack protection from inflation.

Limited Growth Potential

Fixed annuities have a stated interest rate you earn regardless of the market’s performance, which may mean missing out on potential gains.

Less Liquid than Other Investments

Fixed annuities may have harsher penalties and fees for early withdrawals than other investments.

Variable Annuities

A variable annuity provides investment income that increases or decreases based on the underlying investment portfolio’s performance. This portfolio may include bonds, stocks, mutual funds, money market instruments, or a combination.

Some variable annuity issuers provide a guaranteed premium return that protects your initial investment.

Pros

Investment Potential

When your investment selections perform well, your payments increase.

Potential Inflation Hedge

Because variable annuity payments can increase, they’re more likely to keep up with inflation.

Standard Death Benefit

Most variable annuities include a standard death benefit, which pays beneficiaries if you die before withdrawing.

Cons

No Guaranteed Returns

Your investments may not perform positively. Your annuity’s value decreases if investments don’t perform well.

Higher Fees

Purchasing variable annuities can be more expensive than other types of annuities. Fees may include commissions and ongoing expenses.

Increased Complexity

Variable annuities can be complicated and confusing.

Fixed Index Annuities

As a hybrid product, fixed index annuities combine the attractive features of variable and fixed annuities. They provide market-based growth potential while protecting your original deposit and offering a guaranteed minimum return.

Pros

Principal Protection

Fixed index annuities allow you to invest your nest egg and obtain positive upswings with downside protection.

Guaranteed Life Income

Because your principal remains untouched, these annuities can offer guaranteed life income.

Potential for Higher Returns

You can earn additional returns linked to market performance.

Cons

Capped Earnings

While you can participate in the market’s upside without risking your principal, fixed index annuities limit your return.

Complexity

Fixed index annuities can be complex, with many features and options.

Inflation Risk

The minimum rate may not keep up with inflation, which can reduce your investment’s purchasing power.

Immediate Annuities

While you can purchase other annuities with a stream of payments or a lump sum, immediate annuities require a lump sum. It pays you a guaranteed income stream that can start almost immediately. As with most annuities, you can decide whether to receive payments for a specific period or the rest of your life.

Pros

Guaranteed Income

Immediate annuities provide a steady stream of income you can’t outlive.

Simplicity

These annuities are easy to understand and manage compared to other investment products.

Cons

Loss of Control

You typically can’t access your principal once purchased.

Inflation Risk

The fixed payments may not keep pace with inflation.

7 Questions to Help You Find the Right Annuity

Here are seven questions to ask to help you find the right annuity.

1. How Soon Do You Want Payments to Begin?

Consider when you want to start receiving annuity payments. Immediate annuities have a short or no accumulation period, while deferred payment annuities can last over 10 years.

2. How Do You Want to Receive Payments?

You have several options for the duration and type of payments, including fixed period, lifetime, joint lifetime payments, and lump sum.

3. What’s Your Risk Tolerance?

A higher risk tolerance might lead you to variable annuities with the potential for higher returns, while a lower risk tolerance might favor fixed annuities with guaranteed income.

4. Do You Have Surviving Loved Ones or Beneficiaries You Care For?

You may want to consider death benefit riders to pass payments to your loved ones in the event of your death.

5. What Fees Are Involved?

Different annuities have different fees. Understand the costs associated with your chosen annuity.

6. Is the Insurance Company Trustworthy?

Choose a reputable, dependable firm with long-term stability for added peace of mind. Check with financial rating agencies like Standard & Poors, AM Best, Moody’s, and Fitch.

7. How Is the Annuity Taxed?

While most annuities offer tax-deferred growth on earnings, certain annuities might not provide this benefit.

Explore How Annuities Can Fit into Your Plan

Annuities can be complex and confusing, even for experienced investors. That’s why Bankers Life offers personalized guidance and education throughout the process. We specialize in understanding your needs and guiding you toward solutions to help you achieve your ideal retirement.

Interested in having an experienced financial professional review your situation and offer customized insights? Contact a Bankers Life representative today.

We’re here for you!

Bankers Life is here to help customers with their financial and insurance needs so please visit us at BankersLife.com to learn more.

Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.

Bankers Life Securities, Inc., Bankers Life Advisory Services, Inc., and their representatives do not provide legal or tax advice. Each individual should seek specific advice from their own tax or legal advisors.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Bankers Life is the marketing brand of various affiliated companies of CNO Financial Group including, Bankers Life and Casualty Company, Bankers Life Securities, Inc., and Bankers Life Advisory Services, Inc. Non-affiliated insurance products are offered through Bankers Life Securities General Agency, Inc., (dba BL General Insurance Agency, Inc., AK, AL, CA, NV, PA).

Securities and variable annuities offered through Bankers Life Securities, Inc. Member, FINRA/SIPC (dba BL Securities Inc., AL, GA, IA, IL, MI, NV, PA). Advisory products and services offered by Bankers Life Advisory Services, Inc. SEC Registered Investment Adviser (dba BL Advisory Services, Inc., AL, GA, IA, MT, NV, PA).

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