Understand the annuity before making the commitment.
An annuity may help create predictable retirement income, but every contract has different guarantees, costs, restrictions and risks. We help clients evaluate how an annuity may—or may not—fit within their broader financial plan.
An insurance contract designed for accumulation or income.
An annuity is a contract with an insurance company. You generally make a lump-sum payment or a series of payments, and the insurer agrees to provide contract value, future payments or both, according to the terms of the contract.
Payments may begin soon after purchase or be deferred until a later date. Depending on the annuity, returns may be based on a stated rate, an index-crediting formula or the performance of selected investment options.
The appropriate question is not simply whether an annuity is “good” or “bad.” The important question is whether a particular contract supports a specific planning need after considering its cost, liquidity, risk and alternatives.
What financial problem is the annuity intended to solve?
Different annuity structures may address different goals. Defining the purpose first helps avoid selecting features that are costly, unnecessary or inconsistent with your financial plan.
Create predictable retirement income
Certain annuities can convert part of a portfolio into periodic payments for a selected period, for life, or for the joint lives of two individuals, subject to contract terms.
Accumulate assets on a tax-deferred basis
Earnings inside a nonqualified annuity generally grow tax-deferred until distributed. Tax deferral does not mean the earnings are tax-free.
Address longevity or beneficiary concerns
Optional income and death-benefit features may help address longevity, survivor-income or legacy objectives, although riders may involve additional charges and restrictions.
Annuities do not all work the same way.
The terms “fixed,” “indexed,” “variable,” “immediate” and “deferred” describe different contract characteristics. Some contracts may fall into more than one category.
Fixed Annuities
Credit interest according to rates and minimum guarantees stated in the contract. Contract guarantees depend on the claims-paying ability of the issuing insurer.
Stated-Rate StructureFixed Indexed Annuities
Credit interest using a formula tied in part to an index. Returns may be limited by caps, participation rates, spreads or other contract provisions.
Index-Crediting FormulaVariable Annuities
Allocate contract value among investment options whose values fluctuate. Variable annuities are securities and can lose value based on market performance and contract expenses.
Market-Based ValueImmediate Annuities
Generally begin periodic income within a relatively short period after a lump-sum purchase. Payment amounts depend on the selected payout option and contract terms.
Income Begins SoonDeferred Annuities
Accumulate value before withdrawals or income payments begin. Deferred annuities may be fixed, indexed, registered index-linked or variable.
Future Income or AccessConsider the potential benefits and the tradeoffs together.
A meaningful review should give equal attention to what the contract may provide and what the owner may be giving up in exchange.
Potential planning benefits
- Periodic income that may continue for life, depending on the elected payout or rider.
- Tax-deferred accumulation within a nonqualified annuity.
- Optional joint-income, beneficiary or death-benefit features.
- A stated-rate or contract-crediting approach for certain fixed annuity structures.
- The ability to transfer longevity risk to an insurance company through certain income elections.
Material considerations
- Surrender charges or market-value adjustments may apply when money is withdrawn early.
- Contract expenses and optional rider fees may reduce returns.
- Guarantees rely on the financial strength and claims-paying ability of the issuing insurer.
- Index-linked interest may not equal the return of the referenced index and may exclude dividends.
- Variable and registered index-linked annuities may lose value.
- Withdrawals may create taxable income and, in some circumstances, an additional federal tax.
Compare the basic characteristics—not just the projected income.
The actual features of any annuity are governed by its contract, prospectus when applicable, rider forms and state availability.
| Feature | Fixed | Fixed Indexed | Variable | Immediate | Deferred |
|---|---|---|---|---|---|
| Primary purpose | Interest accumulation or future income | Index-linked interest accumulation or future income | Market-based accumulation and potential future income | Income beginning soon after purchase | Accumulation before later withdrawals or income |
| Return source | Rate credited by the insurer | Contract formula linked in part to an index | Performance of selected investment options | Contractual payout based on premium and payout election | Depends on whether fixed, indexed or variable |
| Market exposure | No direct market investment | No direct ownership of the referenced index | Market exposure through underlying investment options | Generally income-focused after purchase | Depends on the underlying contract type |
| Loss potential | Insurer and contract risks remain | Contract, insurer and early-surrender risks remain | Contract value may decline with market performance and fees | Liquidity may be significantly limited after annuitization | Depends on contract type and withdrawal timing |
| Liquidity | Subject to contract withdrawal and surrender provisions | Subject to surrender periods and adjustment provisions | Subject to surrender charges, taxes and contract terms | Often limited once the income election becomes irrevocable | Varies by contract and withdrawal schedule |
| Common costs | May be reflected in credited rates or contract provisions | May include spreads, caps, participation limits and riders | May include mortality, expense, administration, investment and rider charges | Reflected in pricing and selected payout structure | Depends on the selected annuity structure |
| Income timing | Current or future, depending on contract | Usually deferred until elected | Usually deferred until elected | Generally begins within one year | Begins at a future date |
This table is a general educational comparison and does not describe every annuity category. Registered index-linked annuities, for example, have different risk and return characteristics from fixed indexed annuities.
Define the retirement-income need
Estimate essential expenses, discretionary spending, inflation sensitivity and the income already expected from Social Security, pensions and investments.
Review existing assets and liquidity
Determine how much capital should remain accessible for emergencies, healthcare, housing, taxes, gifting and changing personal circumstances.
Examine the contract and riders
Review the surrender schedule, income base, withdrawal base, benefit calculations, rider charges, crediting methods, exclusions and insurer provisions.
Evaluate financial strength and guarantees
Consider the issuing insurer because contractual guarantees depend on its claims-paying ability and are not guarantees of Fiduciary Capital Management LLC.
Compare reasonable alternatives
Consider whether the objective could be met through a different annuity, a bond or investment portfolio, a withdrawal strategy, delayed Social Security or another planning approach.
Coordinate tax and estate considerations
Review ownership, beneficiary designations, tax treatment and estate-planning objectives with the client’s qualified tax and legal professionals when appropriate.
Provide ongoing planning support
Revisit the strategy as income needs, tax laws, family circumstances, contract terms and the broader financial plan change.
Important questions to ask about the contract.
The answers should be available in writing and should be reviewed before funds are transferred or an existing contract is replaced.
What specific financial objective is this annuity intended to address?
How long is the surrender period, and what happens if funds are needed early?
Which contract values or benefits are guaranteed, and which are not?
What fees, rider charges, spreads, caps or participation rates apply?
Can the insurer change any crediting terms, rates or rider provisions in the future?
How is the income amount calculated, and can it decrease after withdrawals?
What happens to the remaining value when the owner or annuitant dies?
How does this option compare with keeping the assets invested or using another retirement-income strategy?
Frequently asked questions about annuities.
When might an annuity be appropriate?
An annuity may be considered when a client has identified a specific need, such as creating predictable lifetime income, transferring part of the longevity risk to an insurer or obtaining contract features not available through a traditional investment account.
Can I access my money after purchasing an annuity?
Many contracts permit partial withdrawals, but surrender charges, market-value adjustments, tax consequences or rider reductions may apply. Certain annuitization elections may be irrevocable and can materially limit future access to the purchase amount.
Are annuity guarantees the same as a government guarantee?
No. Annuity guarantees are contractual obligations of the issuing insurance company and depend on its claims-paying ability. State guaranty-association protection may apply within state-specific limits, but it is not the same as FDIC insurance and should not be the primary reason for purchasing a contract.
Does an indexed annuity earn the same return as the stock market?
Generally, no. Interest is calculated under the contract’s crediting formula. Caps, participation rates, spreads, averaging methods, index terms and the exclusion of dividends can cause credited interest to differ substantially from the return of the referenced index.
Can a variable annuity lose money?
Yes. A variable annuity’s contract value changes with the performance of the selected investment options, less applicable contract fees and expenses. Optional guarantees may apply only to specified benefits and not necessarily to the current account value.
What is a surrender charge?
A surrender charge is a contractual charge that may apply when more than the permitted amount is withdrawn during a stated period. The percentage commonly declines over time, but the schedule varies by contract.
Does an annuity inside an IRA provide additional tax deferral?
An IRA already provides tax-deferred or tax-advantaged treatment. Placing an annuity inside an IRA generally does not create an additional layer of tax deferral. The annuity should therefore be evaluated based on its insurance and income features, costs and suitability for the broader plan.
What should be reviewed before replacing an existing annuity?
A replacement analysis should compare surrender charges, contract values, existing guarantees, rider benefits, new surrender periods, tax treatment, fees, compensation and any features that would be lost. A replacement should provide a documented benefit that justifies its costs and disadvantages.
Review the strategy before signing the contract.
Schedule a video or phone consultation to discuss an existing annuity, a proposed purchase, a replacement recommendation or the role predictable income may play in your retirement plan.
Annuities are insurance contracts issued by insurance companies. Contract guarantees, including income and death-benefit guarantees, are subject to the terms of the contract and the claims-paying ability of the issuing insurer. Fiduciary Capital Management LLC does not guarantee an insurance company’s obligations.
Annuities may include surrender charges, market-value adjustments, mortality and expense charges, administrative fees, investment-option expenses, rider fees, caps, participation rates, spreads and other limitations. Variable annuities and registered index-linked annuities are securities and involve investment risk, including the possible loss of principal. Fixed indexed annuities do not provide direct investment in a market index.
Annuity earnings are generally tax-deferred until distributed. Withdrawals may be subject to ordinary income tax and, when applicable, an additional federal tax for distributions made before age 59½ unless an exception applies. Tax rules vary based on ownership, contract type and individual circumstances. Consult a qualified tax professional.
Advisory services are offered through Fiduciary Capital Management LLC, a registered investment adviser. Insurance products are offered through appropriately licensed independent insurance agencies and are not deposits, are not FDIC insured, and may lose value depending on the product. Registration as an investment adviser does not imply a particular level of skill or training.