What Exactly Are Annuities?

I just can’t grasp it. Can you explain it like I’m a five year old?

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Jim Winkler
CEO/Owner, Winkler Financial Group, Houston, Texas
Your comment made me laugh! And yes, I can answer your great question like a five year old, I'm a master of simple! An annuity is a way of putting money aside now to spend later. You get them through insurance companies. Once you put the money in it, you shouldn't touch it. It sits for many years growing and waiting for you. Once you get old and need it, you tell it you are ready to get paid. It will then start paying you every month until you a.) use it up b.) pass away or c.) your surviving spouse passes away (you pick one when you get it). They are a way of making sure you have money during your retirement.
They are not a good idea for everybody - (like riding a bike without training wheels for the first ever bike ride) some people have trouble with their bills, and setting aside lots of bill money could be a bad thing, so they have to do what is called a 'suitability study' first. It will help figure out if it is a good thing. If the person you talk to doesn't do one, they are bad -run away! And some of them are filled with hiding fees and costs, that eat away like bad bugs at your money while it is away, so you have to be careful and ask 'pacifically what the costs are in total for the annuity. If it doesn't cost too much, it is a good thing. There are lots of types, so ask about all of them and take notes before you even think of giving them your money, k?
I hope that helps, please realize that is greatly simplified. But the bottom line is that the right annuity can be a great part of your retirement plan. Please feel free to contact me for more details, or to answer any lingering questions, okay? Thank you for the 'funnest' question I have ever gotten to answer here!
Answered on July 29, 2015
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Stan Cox II
Insurance Adviser - Broker, SC Insurance Services, Oahu, Hawaii
That's a good question! Annuities are an instrument by which to liquidate a person's wealth over time. The time may be limited to the lifetime of the annuitant, or it may for a stated number of years "certain". In that case even it the annuitant dies before the tiem period runs out the annuity will continue to pay the beneficiary until the money is depleted.
Answered on August 5, 2015
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Charlie Donaldson
President, Generational Wealth Management, Newark, DE
Are we talking about fixed or variable? I'll assume fixed, so here goes...

Annuities, for a 5 year old: Do you know how a CD works? An annuity is the same thing, just with a longer time until you get your money back. CD's are issued by banks, Annuities are issued by insurance companies. Interest from CD's are taxed each year while interest from annuities are not taxed until you take the money. Does this sound like a retirement account? Yup, the IRS thinks so too. If you take money out before they want you to, you're penalized 10% (stupid government). The longer the term, the higher the interest you should expect. CD for 12 months = low interest Annuity for 10 years = slightly more interest.

Were you referring to variable annuities? Think mutual fund account with higher fees (generally).

Now, riders... no 5 year old would ever understand these... except income riders. Here's the deal: You get X percent of the balance of the account, paid to you for the rest of your life... even if the account balance is $0.00. What? I still get paid when there's no money left? Yup! That, my 5 year old friend, is an annuity (with an in come rider).

There's a lot more to it than that. I could write a book on annuities (and many people have). Make sure you work with a competent advisor who can speak your language. If they keep babbling about terms you don't understand, move on and find someone else to work with.
Answered on August 13, 2015
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Terry A. McCarthy, CLU, ChFC
President, Insurance Associates Agency Inc., West Chester, OH
An annuity is a systematic method of accumulation and liquidation of money that you desire to set aside for a later retirement. In the accumulation phase you mostly make deposits into your account. In the liquidation phase, you can take money from the account to provide a steady monthly income for a period of years, and even for the balance of your life. Annuities pay interest like a savings account. Unlike a bank savings account, you don't pay income tax on the interest gained until you begin liquidating your account with either a stream of payments of lump withdrawals. When interest you earn is not taxed today, it has a chance to compound and grow faster. The government will get to tax your gain at a later time, when you start taking out the money. Some annuities can be deducted from income on your 1040 tax statement and this also helps your retirement funds grow faster. These types of annuities are referred to as "qualified annuities" because the annuity meets the tax law qualifications that permit taking a reduction of income for the annuity deposit. While there are lots of rules, if you go back to the start and realize that an annuity is nothing more than a method of accumulating money for retirement, and also a method of distributing money from the account in retirement, you get most of what an annuity really is. Good luck.
Answered on August 18, 2015
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J Paul Wilson CFP, CHFC
Certified Financial Planner, JPW Insurance Retirement Investments, Halifax, Nova Scotia, Canada
In Canada annuities there are two main types of annuities: accumulation annuities and payout annuities. If they are issued by an insurance company they can/do include maturity & death benefit guarantees, potential creditor proofing, estate bypass (privacy and costs) and more. They are used extensively by retirement and estate planners.

The topic of annuities with all our industry jargon is indeed confusing. Experience has taught me that an understanding the basics is the key step.

1. An accumulation annuity is as the name suggests is used to save money, a payout annuity option is included as part of the contract.
There are two main types of accumulation annuities:

Guaranteed Interest Annuity (GIA) - principle is guaranteed and interest is earned similar to a GIC

Guaranteed Investment Fund (GIF) - similar to a mutual fund, the principle is at risk , however, with maturity and death benefit guarantees, etc. In Canada, they are also referred to a segregated funds or variable annuities.

2. Payout Annuities, you exchange a sum of money for a flow of income.
There are many variations with different guarantees but the basic two types are:

Annuity certain, where in exchange for a lump sum of money you receive a guaranteed income for a specified number of years.

Life annuity, where in exchange for a lump sum of money you receive a guaranteed income for the rest of your life or with a joint life. These are usually purchased with a guarantee payment period. The more guarantees, the lower the income.

To understand an annuity, first understand a mortgage. With a mortgage you receive a lump sum of money and pay back principal and interest over a specified term until the balance is zero. With a payout annuity certain you are at the opposite side of the equation, you exchange a lump sum of money for a guaranteed income stream for a specified term.

You will find 16 "I want to ... How do I" , that illustrates some strategies using annuities on www.jpw.ca

Annuity strategies can be complicated. It is your money and you would be prudent work a life insurance broker with a professional designation like a CLU (Chartered Life Underwriter) or a CFP (Certified Financial Planner).

If you have further questions please contact me.

Paul
Answered on November 30, 2015
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