Why Do People Buy Annuities?

Shawn Plummer

CEO, The Annuity Expert

YouTube video

9 Reasons People Buy Annuities For Retirement.

Five Annuity Benefits

Money can grow tax-deferred

When you have many years until retirement—and the potential to live many years in retirement—you want to give your money a chance to grow. Because an annuity is a tax-deferred investment, you give your money a chance to grow faster. You don’t pay taxes on any interest you earn until you withdraw it. This allows all of your interest or investment earnings to compound. It’s important to understand that you get no additional tax advantage when you buy an annuity in an IRA or other tax-deferred account or plan. The earnings and income in the account are already tax-deferred. It would be best if you only considered an annuity for its features and benefits other than tax deferral in these cases.

Contribute as much as you want

Nonqualified, tax-deferred annuities have no IRS-mandated contribution limits. Other tax-deferred retirement savings accounts, such as 401(k) plans and IRAs, have limits. This makes an annuity particularly helpful if you’ve contributed the maximum to a 401(k) or IRA and want to save more money in a tax-deferred vehicle. Here’s another potential advantage: You can allow your annuity to grow as long as you like.

Unlike a traditional IRA or 401(k), an annuity isn’t subject to required minimum distributions (RMDs) when you turn age 72 (unless the annuity is held inside another tax-deferred retirement account subject to RMDs).

Protect your money from market loss

Depending on the type of annuity you choose, you can protect your principal—and even your earnings—from loss during market downtowns. A fixed annuity, for example, offers a fixed rate of interest over the life of the contract and protects both your principal and interest from loss for the full term of
the guarantee period you choose.

A fixed index annuity tracks a market index and provides growth opportunities in line with the index’s performance. Any gains are “locked-in” annually, so if the index underperforms in a given year, your previous earnings are protected, guaranteeing that your annuity won’t lose value in a market downturn

Guaranteed income in retirement

Social Security provides guaranteed income, but it may not be enough to cover all of your essential expenses. Pensions also provide guaranteed income, but few employers offer them.

With most annuities, you’ll have choices that allow you to increase your guaranteed income. When you’re ready to begin withdrawing from your annuity, you could annuitize your contract into payments for life or a specified period rather than taking a lump sum or partial withdrawals. You also may be able to purchase a guaranteed lifetime income rider for an additional fee when you buy the annuity. These options can help guarantee your long-term financial security.

Provide for your heirs

Most annuities have features that allow you to pass the value of your contract directly to your beneficiaries, usually without the proceeds going through probate. You may also be able to designate that a beneficiary receives guaranteed income payments for a certain period or a lump sum.

Generally, your designated beneficiaries will receive the greater of two values:

  • the account value when you die or
  • the amount you contributed to the annuity (adjusted for any prior withdrawals).

Another feature of some annuities is a guaranteed death benefit, which ensures that your beneficiaries receive the full account value (including any interest you’ve earned) should you die before you begin receiving annuity income payments.

Annuities At A Glance

Fixed Index
Principal ProtectionNoYesYesYesYes
Access To PrincipalYesYesYesNoNo
Control Over MoneyYesYesYesNoNo
Tax-Deferred GrowthYesYesYesNoNo
Guaranteed GrowthNoYesYesNoNo
Guaranteed IncomeYesYesYesYesYes
Inflation ProtectionYesYesNoYesYes
Death BenefitYesYesYesYes/NoYes/No
Long-Term Care HelpYesYesYesNoNo

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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