Why You Should Get An Annuity: A Short Explanation

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Daniel Cotter

Daniel Cotter is an attorney with an expert in Annuity and Insurance Law. He graduated #1 in his class from the John Marshall Law School in 1994. He is currently the Attorney on record for Due. He is an expert and insurance regulatory and corporate governance including privacy.... Read More

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drawbacks of fixed annuities

Not everyone understands how annuities work as a financial tool. But as a piece of your complete retirement strategy, there are plenty of good reasons why you should get an annuity.

An annuity offers a lot of great benefits for the annuity holder. Thinking about your long-term financial goals and how much risk you’re willing to take will help you decide. Here’s why you should get an annuity, if these attributes appeal to you.

What is an annuity? 

As a quick refresher, an annuity is a contract you sign with an insurance company. You promise to make payments to the insurance company, and in return, they promise you regular income in the future. You may make one lump-sum payment to the company or choose a contract with a series of regular payments. 

Typically, retirees are the main users of annuities. A guaranteed income stream is a huge positive at any time, but especially in times of economic uncertainty.

Annuities can be one of three types: fixed, variable, or indexed. A fixed version is what it sounds like: it pays you a fixed amount, guaranteed. A variable annuity may vary in rates of return and payouts, offering potential for both greater risk and greater returns. And an indexed annuity provides a guaranteed minimum payout, but another portion of returns is connected to a market index like the S&P 500. 

If you need more details, you can check out the content from some of these top annuity experts

There’s also the option of a deferred annuity, which might provide exactly the flexibility you desire, letting to take payouts at a specified .

The following are some of the primary benefits of getting an annuity. 

Protection against loss of your initial investment

One of the hardest, but most important, factors in becoming financially secure is figuring out the best way to protect your money. You need to select safe investments, but also explore avenues with some level of risk. (After all, taking zero risk with your money often results in very low returns!) 

With a fixed annuity, you get guaranteed protection that your initial investment will never decrease. You can choose a fixed immediate annuity, receiving a fixed rate of payment now, or a fixed deferred annuity, for a set rate of payment later on. 

There is some variance in the amount you’ll receive if you choose a variable annuity. This just gives you a bit of flexibility! You can determine if the additional risk of a variable rate is worth the potentially higher returns.

If you’re investing in the stock market, you run the risk of losing a significant portion of your up-front investment due to market surges and dips. While it’s good to put some of your retirement plans into the stock market, annuities help shield against excessive losses by offering you something that is guaranteed to pay you. 

Why Get An Annuity: fixed income for life

Terms and conditions of different types of annuities vary. There are many annuities that provide the owner, or annuitant, a fixed income for the rest of their life. The security of knowing exactly how much to expect from one source of income can provide peace of mind in retirement. 

With some programs, you’ll specify how long you want to continue receiving payments. Plenty of annuities provide guaranteed payments for the life of the annuitant.

If you select a straight life fixed annuity, it’ll pay you a fixed amount until your death, without benefiting any survivors. This is a positive if you’re mainly concerned about your own retirement accounts running out of money. The annuity will help get you to the finish line with less worry.

A joint life with last survivor annuity will cost more, but provide for a surviving spouse until his or her death. This fixed income for life is ideal for couples needing to provide fully for both people.

A means of paying for long-term care

Annuities provide steady and predictable income, which can be a lifesaver if and when you end up needing long-term care. This is one of those unfortunate unknowns: we can’t predict if or when we’ll need long-term care. 

Long-term care (in a facility because you or your loved ones can’t manage caring for you) is certainly costly. Nationally, nursing home care clocks in at a median of $8,821 per month as of 2020 (according to a Genworth study). You could pay $4,300 a month for assisted living facility care or $4,576 for a home health aide.

These are major expenses and you can’t be sure if, when, or for how long you’ll require them. Long-term care insurance is one option that people use. But annuities are another way of filling in any gaps in your retirement finances.

Other insurance policies may expire before you need them. A lifetime annuity can assure a set amount to assist you in paying the high costs of long-term care when you have no other options.

You can often get the option of a long-term care contract on a fixed or indexed annuity. This increases your monthly benefit in the event that long-term care is necessary. Plus, these types of withdrawals from your annuity are tax-free.  

Annuities provide income for your loved ones

Another benefit of annuities is assurance that your loved ones will be financially secure. Many variable annuities offer an option to get death benefits for beneficiaries after you pass away.

This option helps ease any concerns that you could die during your accumulation phase. Without that death benefit, your spouse or surviving family members might end up with nothing from the annuity.

Instead, the VA death benefit lets your loved ones receive guaranteed payouts as well, making the annuity a good investment for all.

You can even look into death benefit riders and enhanced death benefit riders that protect your initial investment. These ensure that your beneficiaries get a guaranteed amount even in years of poor market performance.

Check out Due’s annuity glossary for more details on various aspects of annuities.

You should explore diversifying your retirement portfolio to provide for a variety of contingencies. Your 401(k) and IRA are important pieces of the puzzle, but annuities can also be a valuable part of your plans.