Attempt to Simplify the Complicated!

Understanding annuities is not easy. What are annuities? Are they as complicated as most articles describe them to be? I will try to simplify your perception of these contracts by dissecting their components.

There are two ways to purchase:

  • periodic payments (usually over many years)
  • lump sum payment (one payment)

There are two types:

  • fixed (fixed interest rate)
  • variable (dependent on stock market performance)
  • (hybrid is a combination of fixed and variable)

There are two ways to receive payments:

  • immediate (payouts begin soon after premium payment)
  • deferred (payouts occur in the future)

I am not a financial advisor. Accordingly the opinions and observations presented are for informational purposes only. They do not represent financial or legal advice.

All Other Modifications Can Be Regarded As Riders

Riders are modifications used by insurance companies to modify an annuity contract and maximize its sales potential. Companies package their products in different ways to attract buyers and ensure company profits.

Knowing what your retirement objectives and understanding annuities are now or will be in the future is a prerequisite for purchasing an annuity.

This is not the time to be guessing or to be pressured by a sales agent.

Of course the future is not known, but logical objectives should be known. Annuity riders allow you to select or amend a contract to fit your retirement plan. You need to choose the right plan for you - not the one the insurance company offers or that the salesperson is pitching.

Questions to Ask Yourself

  • Do you want income for the remainder of your life or for a pre-determined number of years?
  • Do you prefer to have the greatest return on your investment even if nothing is left for your heirs?
  • Is leaving any money to your heirs important?
  • Are you concerned that if you die before your life expectancy, the insurance company wins and your heirs lose?
  • How important is it that the payments increase to offset inflation?
  • Would you consider deferring payments for a few years to insure larger payments?
  • Is it important that payments continue after you or your spouse die?
  • Would you like to have the option to increase your periodic payments to create a larger payout for a lifetime?
  • Is a contract with a provision for long term care of any interest?
  • How about a contract that would guarantee no possibility of principal loss, guarantee monthly payout amounts, and simultaneously provide the opportunity for participating in stock market gains?

Everything Has a Cost

Annuity riders can be expensive. But, they do allow you to tailor your retirement planning. I have several contracts with various ridersto provide the objectives that my retirement plan requires.

Here is an outline that can be used to help identify what is available for you:

Payout period is defined

  • Lifetime payout - This means that you will have a lifetime income. Payouts expire when you do.
  • Specified years of payout - This option is usually for 5 to 20 years.

Payouts that guarantee a return of investment (lifetime income without losing control of your assets)

  • Lifetime payout with Period Certain - The payouts are for the annuitant's lifetime. If the annuitant dies prior to the number of years that the payouts are guaranteed, payments continue or a lump sum is paid to the beneficiary.
  • Lifetime payout with Refund Certain - The payouts are for the annuitant's lifetime. The beneficiaries receive the initial premium that was paid to the insurance company less the sum of the payouts received by the annuitant.

Payouts are adjusted or can be adjusted during payout period

  • Inflation adjustment - Payouts increase each year, usually by a fixed dollar amount. Initial payouts are less than they would be without this option.
  • Payouts can be increased or decreased by the annuitant according to his needs.
  • Penalty-free withdrawals - In time of financial need, additional funds may be needed.
  • Additional contributions can be made to the annuity contract in order to increase future payouts.

Contract values vary, but payouts are guaranteed

  • Hybrid annuities - The contract value is determined by the performance of a mutual fund subaccount. Payouts are guaranteed not to be less than stated in the contract. These contracts vary considerably from company to company and can be complicated and difficult to understand.
  • Equity Indexed Annuities (EIA) - The contract value is determined by the performance of an index, usually the S & P 500. Minimum payouts may be guaranteed by the contract.

Note: The nuances in hybrid and EIA contracts may include various limitations on earnings and payouts.


  • Joint and Survivor - This is a popular option for married couples. Benefits continue after the death of one of the annuitants. The payouts may remain the same or decrease according to the terms of the contract.
  • Long Term Care or Nursing Home - This contract has provisions that will contribute to the need for long term care. Understanding the restrictions is critically important.
  • Waiver of Premium - If you are in the accumulation phase of an annuity and you become disabled, the premium payments are waived.


Understanding Annuities is easier if the components are defined separately rather than as a package. For example, social security can be viewed as an annuity. It is a deferred lifetime annuity as periodic (variable) payments are made for years before payouts are received. It has two riders:

  • inflation
  • joint and survivor

It is unlikely that a single annuity will have all of the features that make it perfect for your retirement goals. My approach was to select several annuities as my goals were: lifetime income, return of investment to heirs, guaranteed return, and participation in stock market gains.

Having several annuities as part of a retirement portfolio accomplished another goal. It provided a safety net if the insurance company goes bankrupt. Each state has a State Guarantee Association that is funded by insurance companies to prevent losses by annuitants. The amount of coverage and conditions that protect your investment varies from state to state.

Understanding annuities can bring stability and guarantees to your retirement portfolio. With consistency assured you may choose to be more aggressive in other investments.

Finding an investment advisor who has built a business based on the needs of his clients is essential. Comparison shopping for annuities is also vital. And do read the contract.

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