Annuities: Guaranteed Lifetime Income and More

Feb 19, 2020

[Life Insurance 101 Series: This series features IMPACT posts that detail the breadth of the industry’s reach and benefits provided to consumers.]

Americans are living longer and financial security through retirement is a big challenge for many.

One proven way to face that challenge is by purchasing an annuity. The certainty this tool brings is welcome amid the financial pressures of daily life.

An annuity is a contract between a consumer and a life insurer. The consumer pays a premium(s) to an insurer, which promises to pay the consumer income.

Annuities are the only product in the private marketplace that can provide payments guaranteed for the rest of the consumer’s life.

Insurers offer many types of annuities with options on funding, guarantees and payouts depending on the contract.

  • Annuities are funded with a one-time payment or a series of payments.
  • Besides guaranteed income, other possible guarantees include death benefits and minimum credited interest rates.
  • Income payments can begin immediately or at a later date.

Deferred annuities come in several varieties:

  • Fixed annuities guarantee the consumer’s money will earn at least a minimum interest rate. Fixed annuities may earn interest at a rate higher than the minimum. The insurance company sets the rate in accordance with the terms of the contract.
  • Fixed indexed annuities earn interest based on changes to a market index, which measures the performance of a financial market or a portion of the market. These annuities contain a minimum guaranteed interest rate, even if the market declines.
  • Variable annuities earn investment returns based on the performance of investment portfolios, known as “subaccounts,” where a consumer chooses to put their money. Variable annuity account values fluctuate relative to the investment experience in the subaccounts. Some variable annuities have guaranteed income riders. Consumers can select a fixed payout or variable payouts that continue to reflect market performance.

Interest earnings credited on deferred annuities accumulate tax deferred until withdrawn, making them a useful retirement planning tool.

Annuities are regulated by state insurance commissioners. Variable annuities are also registered as securities with the Securities and Exchange Commission (SEC).  State insurance commissioners, the SEC and the Financial Industry Regulatory Authority regulate variable annuity sales conduct. Any of these useful tools are subject to robust regulation.

Jim Szostek

Jim Szostek is Vice President & Deputy, Retirement Security at the American Council of Life Insurers (ACLI). He helps guide ACLI policy on legislation and regulations affecting the U.S. retirement system. Prior to joining ACLI in 2008, he held positions at CIGNA and The Hartford.