Basics of Life Insurance Annuities

When you think about planning for your future and the future of your loved ones, you typically think about retirement plans like 401Ks and life insurance.  Annuities are another vehicle to ensure you or your loved ones have the financial support needed for a high quality of life. There are several reasons you might choose an annuity and different options to customize them to meet your financial goals.  

You may be asking yourself, “What is an annuity anyway?”  Annuities are contracts with insurance companies where a sum of money is paid in the form of a premium and the funds are distributed back to the payee or to a designated beneficiary over time.  Contracts determine the pay schedule and interest rates earned on the premiums paid. 

• Some pay until the designated payee’s death, while others pay until a determined date.  The majority of annuities are used to accumulate funds free of many types of taxes and are withdrawn from in large lump sums, rather than over time.  Unlike some retirement funds, deposits in the form of premiums are made after taxes.  Earnings typically grow tax-free. 


• Annuities can be used many ways.  Some people use them as a retirement vehicle, as they do not have contribution limits, like 401ks and other IRAs.  This makes annuities desirable to those who have already maxed out their contributions to their retirement funds, but desire more financial protection for the future.  Retirees who have already stopped working, but fear they might outlive their current investments might gain piece of mind from a plan that guarantees payments for the remainder of their lives.  Professionals who are susceptible to malpractice lawsuits also find annuities attractive, as they are typically credit protected in many states and are safe from malpractice suits. 


• There are two types of annuities: fixed and variable.  Fixed annuities give a pre-determined interest rate on earnings over time.  Variable rates are determined by the markets as premiums are traditionally invested in stocks, bonds and market accounts. 


• There are insurance benefits of annuities, as well.  Policies can include death benefits, guaranteed payments for life and guaranteed payments to a designated beneficiary.