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Annuities

Annuities

Until recently, the focus of retirement planning has been devoted almost exclusively to the accumulation of assets.  This is understandable, given the large population of baby boomers who were still in the pre-retirement stage and still actively working and accumulating their retirement savings.  But as the members of this demographic begin to cross the retirement threshold - many without a traditional pension plan - they must now address the other side of the retirement equation: turning their accumulated savings into income.  The overriding question they ask is, "How can I make my money last as long as I do?"  For many, the answer may be an annuity.

What Is An Annuity?

An annuity is a financial instrument that provides a means to accumulate funds for the future, and then systematically distribute those funds over a given period.  Annuities are issued by insurance companies; their provisions and the rights they convey are set forth in the form of a contract between the owner and the insurance company.

With an annuity, the owner deposits money into the contract in the form of premiums.  The insurer then invests those funds, which are credited with interest earnings or grow in value in relation to the performance of the investments in which they are deposited.  At a certain point in the contract's life, the insurance company - at the owner's direction - will convert all or a portion of the contract's funds into a series of periodic income payments.  These payments are calculated actuarially to extend for a certain number of years or for the duration of the owner's life.  This process is annuitization - applying capital to purchase income.  By design, annuities can serve as both asset accumulation vehicles or asset distribution vehicles.

One of the unique aspects of an annuity is that through annuitization, the product can generate income payments that can last as long as the contract owner wishes.  This period can be for a specified number of years or a lifetime.  For this reason, annuities are well suited for retirement planning.

Types of Annuities

There are many different types of annuities.  The primary distinctions among these types and what separates one type of annuity from another are based on two fundamental factors:

For a free copy of the LIMRA September 2014 Update of The Facts of Life and Annuities click here.


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