An annuity is a contractual agreement between you, the annuity purchaser, and a life insurance company, the issuer. This agreement typically states that the life insurance company will pay you a specified amount of payment for an agreed upon period in exchange for a paid premium. This period may be a specific length, such as 20 or 30 years, or for life. The guaranteed rates of return often vary depending on the length of the contract. Modern annuities will often feature a Guaranteed Minimum Withdrawal Benefit (GMWB) rider that provides a hybrid option for the payment period. This rider gives a lifetime income guarantee, but allows the annuity purchaser to maintain control over the invested asset. Additionally, at the time of death, the remaining balance of the annuity contract value is passed directly to the beneficiaries designated by the annuity purchaser.

Guaranteed* Lifetime Income**

Annuities are insurance products and differ from securities in that they can provide guarantees to their policyholders. These guarantees may be a fixed rate of return, or a lifetime income that cannot be outlived. During the retirement planning process, it can be difficult to predict and prepare for abnormal market conditions such as those seen in 2008. During the financial crisis, many retirees saw a significant portion of their retirement portfolio vanish, never to be recovered. To protect retirees from these abnormal events, it is important to consider allocating a portion of an individual’s retirement portfolio towards a guaranteed annuity product. In doing this, assets specifically set aside for retirement income can be insulated from poor market performance, while still providing an acceptable rate of return.

Fixed Indexed Annuities

Often called equity indexed annuities, or hybrid annuities, these annuities provide a guaranteed rate of return (such as 1%), with potential to participate in the appreciation of an external index such as the S&P 500. The guaranteed rate of return of an indexed annuity acts as a floor rate of return, allowing policyholders to limit potential losses, while still maintaining the potential for a equity market-linked return. If the index rises, the investor participates in the gain. In the case of a market loss, the annuity is credited the guaranteed rate of return (e.g.1%).

Indexed annuities can be a fantastic solution for many retirees who seek a stable return on their retirement assets during the decumulation (distribution) phase of their retirement. When considering an indexed annuity, it is important to pay close attention rider fees, participation, and cap rates. Likewise, the guarantees of an annuity rely on the financial strength and claims-paying ability of the insurance company, so it is important to consider the financial ratings of the issuing insurance company.

What to Watch Out For When Shopping For an Annuity

When shopping for an annuity, it is important to consider the type of annuity being presented, and the financial strength of the issuing company. The annual fees of the annuity, as well as participation and cap rates, can have the most significant impact on its long-term performance.

In particular, variable annuities should be considered with utmost scrutiny. These investments will often have layered fees that include management fees, surrender charges, mortality and expense (M&E) fees, rider fees, and expense ratios of underlying mutual funds. In total, these can often total to well over 3% of the annuity’s value annually. When fees are this high, the majority of an investor’s earned interest may not be realized, especially with more conservative portfolio allocations. When this is the case, a fixed or indexed annuity can provide a comparable or higher rate of return, but at a lower cost.


*Annuity guarantees rely on the financial strength of the issuing insurance company and are not guaranteed by banks or FDIC.

**Some annuities may have a lifetime income guarantee as part of their policy, while some may have optional riders to provide the same benefit. These optional riders may be provided in some cases with an additional charge. Some riders may provide other benefits such as an annual increase to mitigate inflation or to cover certain health events.