What is an Annuity and How Does it Work?

Jon Ianniello
February 6, 2023
Annuities

There are many resources and options available for individuals that help provide financial security and peace of mind as you plan for your future. Annuities are a great option to fill this need, however many are not familiar with what they are and how they can help. Let’s walk through what an annuity is and how it fits into your long term financial goals.

What is an Annuity?

An annuity is an investment which is issued as a result of a contract with an insurance company that can be used to build a guaranteed income stream or a retirement nest egg. In short, you can use an annuity as a way to create your own kind of IRA or pension fund. There are multiple types of annuities that can fit the needs of various goals or lifestyles, and they each have their own benefits.

Why would I need an annuity?

As with many insurance products or investment opportunities, it’s important to know your financial goals so that you are exploring products that will help you attain the independence and success you desire. Primarily, annuities help the investor secure predictable income or build wealth with benefits such as having a lifetime income, a fixed interest rate, and tax-deferred growth potential. If any of these goals or benefits are appealing to you, it is worth talking to your insurance agent to explore the options further.

Types of Annuities

When considering an annuity, there are several types that have different benefits and can be used to attain various goals.

Immediate vs. Deferred Annuities

The difference between the two relates to when payments begin to the investor. Immediate annuities begin paying immediately after the deposit of a lump sum. Deferred annuities begin paying out at an age that the client specifies they would like to begin receiving payments.

To learn more about the difference between Immediate and Deferred Annuities, visit our article here.

Fixed vs. Variable Annuities

Choosing between these two comes down to the goals of the investor. Fixed annuities provide regular periodic payments to the individual for stable cash flow. Variable annuities allow the owner to receive larger future payments if investments of the annuity fund do well and smaller payments if investments are a lesser value.

Annuity Terminology to Know

Entering a conversation about the right annuity for you can be intimidating, but being familiar with some of the language helps you navigate the process and feel more confident in your needs. Here are some terms that may come up that will give you a better understanding of annuities.

Annuity fund:

Investment portfolio in which an annuity holder’s funds are invested

Surrender period:

the amount of time an investor must wait before they can withdraw funds from an annuity without facing a penalty

Accumulation phase:

period of time when an annuity is being funded and before payouts begin

Annuitization period:

the phase when the owner of an annuity begins to receive payments from the annuity investment

Annuitants:

an individual who is entitled to collect regular payments of a pension or an annuity investment

Preparing for an Annuity Consultation

If you’re planning to ask your insurance agent or other financial advisor about annuities, make sure you come prepared with the right questions to ensure you’re getting a product that is the right fit for you.

Know the surrender period of your annuity and how it fits with any needs or life circumstances you may encounter. If you’ll need cash for a wedding or other significant event, this would be something to consider when thinking of your annuity payments and period where withdrawals would incur penalties and fees.
Contract riders can outline important details of the annuity such as the age when payments kick in and can have fees associated with them. Considering these details in advance will help you feel more prepared to select the annuity that is right for you.

Overall, annuities are an option to help you meet your financial goals and protect your standard of living. We are here to assist you as you navigate these conversations and determine the right options for you and your family.

Annuities with Ianniello Insurance Agency

We offer annuities at Ianniello Insurance Agency. Let’s talk about how we can help you protect your quality of life with an income stream you can count on in retirement. Simply fill in a quote request online here or give us a call at 740.295.9460 to discuss your needs further. We look forward to helping you select the right option for you and your family.