Annuities Explained Simply: Income, Guarantees, Fees, and Liquidity

An annuity is a contract with an insurance company. In exchange for a premium, the contract may provide growth potential, income options, death benefit features, or a combination of benefits depending on the product.

Annuities are not right for everyone. They should be reviewed in the context of your income needs, time horizon, liquidity needs, taxes, risk tolerance, and other retirement resources.

Fixed annuities generally provide a declared interest rate for a period of time. Indexed annuities credit interest based in part on a market index formula, subject to contract terms. Variable annuities involve investment subaccounts and can rise or fall in value.

Immediate annuities can begin income payments soon after purchase, while deferred annuities are designed for a later income date. Each structure has tradeoffs, and product availability varies.

Some annuity features may include guarantees, but guarantees are subject to the terms of the contract and the claims-paying ability of the issuing insurance company.

A guarantee does not mean every outcome is guaranteed, every fee disappears, or the product is automatically the best fit. The details in the contract matter.

Many annuities have surrender periods, which means taking out more than the allowed amount during a certain window may trigger surrender charges. That can make liquidity one of the most important topics to review.

Fees and charges also vary by product. Some contracts may include rider costs, mortality and expense charges, administrative fees, investment-related costs, or other expenses. Tax treatment can also be complex, so tax questions should be reviewed with a qualified tax professional.

Before buying an annuity, ask what problem the contract is meant to solve, how income is calculated, when money can be accessed, what fees apply, what happens at death, and how the product compares with alternatives.

Margaret helps clients review these questions in plain language so they understand the contract terms, tradeoffs, and available options before making a decision.