We’ve already covered five annuity facts that many people don’t know, but since there are plenty of misunderstandings about annuities out there, let’s identify five more facts to help you determine if an annuity might fit your financial goals and retirement strategy.
Fact 1: Annuities Can and Do Protect Against Inflation
One feature that is available on many annuities is a cost-of-living adjustment (COLA). This adjustment (typically between one and five percent) increases your payments each year, helping protect your annuity income against inflation. With the COLA option, your payouts are designed to increase over time, so this may reduce the amount you receive in the earlier years.
The COLA benefit only begins after you start receiving payments, not during the period when your annuity is growing in value (accumulation), so it does not protect deferred annuities against inflation that may occur during this period. You may pay additional fees for this option with some annuities. A financial professional can talk to you about whether a COLA option is appropriate for your situation and what fees, if any, you will pay for the option.
Fact 2: Annuity Payments Can and Do Continue After You Die
Annuities can and do continue to make payments beyond your own lifetime. Many annuities offer death benefits that pay your beneficiaries payments after your death, typically for the remainder of a set period of time or until a guaranteed minimum has been paid out.
There may also be a “guaranteed return of premium” option available. This continues to pay your beneficiaries until the total amount paid out equals the total amount you paid into your annuity.
Fact 3: You Can Share Your Annuity with Your Spouse
Another option to extend your annuity payments beyond your own lifetime is to purchase a joint annuity with your spouse. A joint annuity makes payments for both your lifetime and the lifetime of your spouse, allowing your spouse to continue to receive the payments after you die.
Bear in mind that payments from joint annuities may be less than annuities paying only you. This is because payment amounts are partly determined by life expectancy, which can increase when two lifetimes are considered compared to just one.
If you own a deferred annuity and you have not elected to start receiving payments, laws allow you to designate your spouse to take over the annuity at your death without paying any income taxes until the spouse begins to receive payments.
The fact is, with an annuity, you can access your money early if you need to.
Fact 4: Your Money is Not Locked Up in an Annuity
You can’t always predict when you’ll need a little extra cash, so you may be hesitant to place your money somewhere you can’t reach it. But the fact is, with an annuity, you can access your money early if you need to.
There are many features available to you that provide access to your money, but there may be fees for some early withdrawals.
Many annuities allow you to take out a certain percentage of your money (typically 10 percent) without paying a surrender fee, but this will depend on your annuity contract. Additionally, some contracts will waive the surrender fee under certain circumstances, such as terminal illness or nursing home care.
Some annuities allow you to take a steady stream of income over time, typically at least five years or more, without paying any additional fees. The process of taking steady payments is called “annuitization” and will be described in your annuity contract.
That said, you may incur surrender fees or charges for early withdrawals—these are withdrawals made before your surrender period is over. The surrender period is the length of time you have to wait until you can withdraw from the annuity without paying fees. This period can vary by annuity, though it’s typically between five and 10 years, and some surrender fees decline over the period.
On top of surrender fees, there is also a tax penalty for withdrawing money from your annuity before you reach age 59 ½, so think carefully about your immediate financial circumstances before making early withdrawals and talk to your financial professional about your options. And, of course, any withdrawals will be subject to ordinary income taxes, too.
Fact 5: State Insurance Laws Require That Your Annuity Can Be Returned
If you’ve just purchased an annuity but have doubts about your decision, there is a period of time (known as the free look period) during which you can receive a full refund. This window varies by state and is typically between 10 and 30 days. So if you decide you want to change something about your annuity or return it altogether, there is an opportunity for you to make adjustments.
Consider all the facts before deciding whether an annuity is right for your retirement income strategy. A financial professional can give you more information about annuities and help you determine if one is right for your financial situation.
Annuities are long term financial products designed for retirement income and may not be suitable for everyone. They involve fees, expenses and limitations, including surrender charges for early withdrawals. Some include optional riders and benefits that may come at additional cost. Annuity product and feature availability may vary by state.
Annuity guarantees are backed by the financial strength and claims-paying ability of the issuing company.