All annuities are issued by insurance companies. The primary two agencies that rate the claims-paying ability of life insurance companies are AM Best and Standard and Poor’s. Their rating categories are as follows:

AM Best                                              Standard and Poor’s

Superior          A+                                Superior          AAA

Excellent          A                                  Excellent         AA

Good                B+                                Good                A

Fair                  B                                  Adequate         BBB

Marginal         C+                                Vulnerable       BB

There are several types of annuities. Some that are designed to generate lifetime income and some that are designed for conservative growth/preservation of capital. All annuities are tax-deferred until income payments begin.

 

Different Types of annuities

1. Immediate Annuity (IA)

An immediate annuity is a financial contract between an individual and an insurance company, where the individual pays a lump sum of money in exchange for guaranteed income payments. The payments can start as early as the following month and can last for a set period or for the rest of the individual’s life. 

2. Fixed Annuity -Multi-Year Guaranteed Annuity-(MYGA)

This type of annuity offers a predetermined interest rate for a set period of time, typically between 2 and 10 years. They offer principal protection and are a popular choice for investors wanting a reliable rate of return and a predictable income stream.

3. Fixed-Index Annuity (FIA)

A fixed index annuity (FIA) is a long-term investment that allows your money to grow tax-deferred, while also protecting your principal from market losses. Your money is invested in various indexes that provide opportunity for growth but with no downside risk. Gains are locked in each year they are made.

4. Variable Annuity (VA)

A variable annuity is a contract between you and an insurance company. It’s an investment account that grows tax-deferred and allows you to invest in a number of investment options, called sub-accounts. Similar to mutual funds, these sub-accounts allow you to spread your wealth across a wide range of investment options, including stocks, bonds, and alternative investments. Unlike fixed or fixed-index annuities, variable annuities involve investment risk and may lose value.

Potential Benefits:

One of the key benefits of an annuity is that it allows an investor to save money without paying taxes on the interest or gains made, until a later date (when liquidated or withdrawn). Annuities grow tax-deferred and have no contribution limits, unlike 401(k)s and IRAs. Another significant benefit of annuities is the creation of a predictable income stream, like your own personal pension, which can be used to supplement your income in retirement. With an annuity, you never have to worry about outliving your money. This is a major advantage in the post-pension age. The reasons for investing in an annuity should align with your unique goals, lifestyle and financial situation. Other benefits include:

1. Tax-Deferred Growth

You save money without paying taxes on the interest until a later date.

2. No Contribution Limits

Unlike 401(k)s and IRAs, you set the dollar amount you invest.

3. Lifetime Income

Annuities create predictable income streams for life.

4. Provide for Your Family

Death benefit riders allow you to transfer your money to your loved ones.

Finding the right financial solution is essential; it wouldn’t be wise to invest in a product that doesn’t align with your needs.

Potential Cons:

When evaluating annuities, it’s important to consider several factors that may appear negative:

1. Commissions and Fees: Most annuities pay a commission to the selling agent/advisor. This commission is paid by the issuing insurance company and not by the investor. Some annuities have fees and others have no fees. It’s important to know what the fees are when investing in an annuity.

2. Complexity: There are several types of annuities, each offering different features and benefits. Some annuities offer living benefit and death benefit riders that can be confusing.

3. Limited Liquidity: Most annuities have a surrender schedule of contingent deferred sales charges (CDSC) in the first 2-10 years, depending on the length of the annuity contract. A typical annuity will offer the investor the ability to withdraw up to 10% as a free withdrawal if needed.

4. Conservative Returns: Compared to some investment products, certain annuities may often have a capped rate of return. This would be in the form of a fixed index annuity. Variable annuities are tied to the markets and can provide greater volatility and the potential for higher returns.

5. Opportunity Cost: This refers to the potential gains you might miss out on by choosing certain annuities over other investment options. For younger investors with a long-term time horizon, this could be a significant consideration, as they might benefit more from a riskier, growth-oriented strategy.

For older investors and retirees, the opportunity cost might be less of a concern. They should focus more on stability and guaranteed income, which annuities can provide.

Disclosure: Although it is possible to have guaranteed income for life with a fixed annuity, there is no assurance that this income will keep up with inflation. There is a surrender charge imposed generally during the first 5 to 7 years or during the rate guarantee period. Any guarantees offered are backed by the financial strength of the insurance company, not an outside entity.