What Is an Annuity?

An annuity is a type of financial product you can get from an insurance company that lets you set money aside to create guaranteed income in retirement. Whether retirement is decades away and you’re still saving or it’s right around the corner, adding an annuity to your financial plan can give you more certainty than using investments alone.

But how does an annuity work? We’ll help you understand the different kinds of annuities and what you should know about them, as well as how annuities can work with other financial tools to help you feel more confident about your retirement.

While there are many different types of annuities, they typically come in two main varieties — annuities that help you accumulate funds for retirement and annuities that help you create guaranteed income in retirement.

Within each category of annuity, you have additional options.

Retirement should be an exciting time. With the right planning, you’ll ideally be able to enjoy 20 to 30 years of life however you want — and work only if you want to, not because you need to. But 20 or 30 years is a long time to live off your savings. When you build a retirement plan for living longer, there are several risks that you’ll want to consider. These risks include:

A solid retirement plan will use a mix of different financial tools — including investments, Social Security and even permanent life insurance — to help you address these risks. But annuities can play a key role when it comes to protecting your plan from market volatility and longevity. And they can also help with many of the other risks. Here’s how an annuity can help:

While annuities can be a great part of a retirement plan, several myths about them have grown over the years. Take this quiz to discover a few of those myths and the real story about annuities.

This is a common question when people are considering an annuity.

Ultimately, what happens to the money in an annuity when you die will depend on the type of annuity you get and how you structure it. But there are many ways to ensure that your loved ones are taken care of if you pass away unexpectedly.

First, if you have a fixed or variable accumulation annuity (one that helps you save for retirement) and haven’t converted it into income, the value of the annuity will pass to your beneficiaries when you die. In fact, many variable annuities come with a guaranteed death benefit, so your loved ones get back at least what you put into it.

If you have a deferred income annuity (which starts paying out a regular income after a pre-determined period) and you die during the deferral period, your beneficiaries can typically get the full value of the policy.

Once you start taking payments, you can add a number of options to your annuity that affect how long you receive payments and help to ensure your money is passed on to your heirs if you die before a certain date. It’s important to point out that all these features come at a cost. The more guarantees you add, the lower your monthly payment will be unless you increase your upfront payment.

Consider speaking with a financial advisor to see which type of annuity and which features make the most sense for you — and can help you be more confident you’ll have the income you need for retirement.