Annuities
An annuity is an insurance contract issued by an insurance company. Annuities are often used as part of retirement planning because they may provide tax-deferred accumulation, future income options, or a stream of payments for a specific period or for life.
Annuities are not right for every person. They can be complex, may have surrender charges, may limit access to funds, and may involve tax consequences if money is withdrawn early. The right annuity, if any, depends on your financial situation, retirement goals, income needs, liquidity needs, risk tolerance, time horizon, tax status, and the specific terms of the contract.
Orion Financial Services LLC can help review available annuity options and explain how different contract types may fit your planning objectives.
Why Consider an Annuity?
Annuities may be considered by individuals who want to plan for future retirement income, protect against the risk of outliving assets, or accumulate money on a tax-deferred basis.
Depending on the type of annuity and the contract selected, an annuity may offer:
Tax-deferred accumulation
Guaranteed interest rate options
Potential lifetime income
Period-certain income options
Death benefit options
Optional riders or enhanced benefits
Market-linked crediting options in certain fixed indexed contracts
Investment options in variable contracts
All benefits are subject to the terms, conditions, limitations, fees, surrender periods, and exclusions of the annuity contract. Guarantees are backed by the claims-paying ability and financial strength of the issuing insurance company.
What Is an Annuity?
An annuity is a contract between you and an insurance company. In exchange for a premium payment, the insurer agrees to provide certain contract benefits. These benefits may include accumulation value, interest crediting, income payments, death benefits, or other features depending on the contract.
Annuities may be funded with a single premium or with multiple payments. Income may begin immediately or at a later date. Some annuities provide payments for a fixed number of years, while others may provide income for life.
Before purchasing an annuity, it is important to understand how the contract works, including fees, surrender charges, withdrawal limits, tax treatment, income options, death benefit provisions, and whether the annuity can lose value.
Common Benefits
Tax-Deferred Growth
Earnings inside a non-qualified annuity generally grow tax-deferred until withdrawn. Tax treatment varies and should be reviewed with a qualified tax professional.
Income Options
Annuities may provide income for a fixed period, for life, or for the lives of two people depending on the payout option selected.
Principal Protection in Certain Contracts
Fixed annuities and some fixed indexed annuities may offer protection from direct market losses, subject to contract terms and insurer guarantees.
Death Benefit Options
Some annuity contracts include death benefit provisions. The amount and form of the death benefit depend on the contract and whether income payments have started.
Optional Riders
Some annuities offer optional riders for an additional cost. Riders may provide enhanced income, death benefit, withdrawal, or long-term care-related features, depending on the product.
Important Risks and Limitations
Annuities also involve risks and limitations, including:
Liquidity Risk
Annuities are generally long-term contracts. Withdrawals may be limited, and early withdrawals may reduce contract value.
Surrender Charges
Many annuities impose surrender charges if funds are withdrawn during the surrender period.
Tax Consequences
Withdrawals may be taxable as ordinary income. Withdrawals before age 59½ may also be subject to an additional federal tax penalty.
Insurer Credit Risk
Guarantees depend on the claims-paying ability and financial strength of the issuing insurance company.
Inflation Risk
Fixed payments may lose purchasing power over time if inflation rises.
Market Risk
Variable annuities involve investment risk and may lose value based on the performance of the underlying investment options.
Complexity
Some annuities include caps, participation rates, spreads, rider charges, market value adjustments, or other contract features that should be reviewed carefully before purchase.
Tax Treatment and Early Withdrawal Penalties
Annuities may receive tax-deferred treatment, meaning taxes on earnings are generally deferred until money is withdrawn. When withdrawals are taken, taxable amounts are generally taxed as ordinary income.
Withdrawals taken before age 59½ may be subject to an additional federal tax penalty, unless an exception applies. In many cases, the additional tax is 10% of the taxable portion of the early distribution. Certain deferred annuity withdrawals may be subject to a different penalty rate depending on the contract and applicable IRS rules.
Annuity owners should also consider surrender charges, withdrawal limits, required tax reporting, and possible state tax consequences. Tax treatment depends on whether the annuity is qualified or non-qualified, how the contract is funded, the owner’s age, the withdrawal method, and other individual circumstances.
Orion Financial Services LLC does not provide tax or legal advice. You should consult a qualified tax professional before purchasing an annuity or taking withdrawals from an annuity contract. For more information on the tax treatment of annuities please read IRS Publication 575.
Types of Annuities
Annuities are commonly grouped by when income starts and how the contract value grows.
Immediate Annuities
An immediate annuity is typically funded with a single premium and begins income payments within a short period of time, often within one year. Payments may continue for a specific period, for life, or under a joint life option.
Immediate annuities may be useful for individuals seeking predictable income, but they may also limit access to the premium once income payments begin.
Deferred Annuities
A deferred annuity allows money to accumulate before income begins. The owner may later choose to withdraw funds, keep the contract in force, or elect an income option, depending on the contract terms.
Deferred annuities may include fixed annuities, fixed indexed annuities, and variable annuities.
Fixed Annuities
A fixed annuity provides interest crediting based on rates declared by the insurance company, subject to the contract’s minimum guarantees. Fixed annuities may appeal to individuals seeking principal protection from direct market losses and a predictable interest-crediting structure.
Fixed annuities are not bank deposits, are not FDIC insured, and are not guaranteed by any bank or federal government agency.
Fixed Indexed Annuities
A fixed indexed annuity credits interest based partly on the performance of an external market index, subject to contract terms such as caps, participation rates, spreads, floors, and crediting methods.
Fixed indexed annuities generally provide protection from direct market losses, but they do not directly invest in the index. Gains may be limited, and contract terms can change at renewal according to the policy.
Variable Annuities
A variable annuity allows contract value to be allocated among investment subaccounts. The value can increase or decrease depending on market performance.
Variable annuities involve investment risk, including possible loss of principal. They may include optional riders for an additional cost. Variable annuities are typically suited for individuals who understand market risk and have a longer time horizon.
Common Payout Options
Annuity income options may include:
Period Certain
Payments are made for a selected period, such as 10, 15, or 20 years.
Life Only
Payments continue for the life of the annuitant. Payments usually stop at death unless the contract provides otherwise.
Life with Period Certain
Payments continue for life, but if the annuitant dies during the guaranteed period, payments continue to the beneficiary for the remainder of that period.
Joint and Survivor
Payments continue for as long as one of two covered individuals is alive. Payment amounts are often lower than a single-life option because the insurer may be paying over two lifetimes.
Annuities and Retirement Planning
An annuity may be one part of a retirement plan, but it should be reviewed alongside other assets, income sources, debts, tax considerations, emergency funds, estate planning needs, and liquidity needs.
Money used to purchase an annuity should generally not be money needed for short-term expenses or emergency liquidity.
Review Your Options
Orion Financial Services LLC can help explain available annuity options, compare contract features, and review whether an annuity may be appropriate based on your stated needs and objectives.
Before purchasing an annuity, you should review the contract, surrender schedule, fees, income options, tax treatment, rider costs, and insurer financial strength. You should also consult a qualified tax, legal, or financial professional regarding your specific situation.
Important Disclosure
Annuities are long-term insurance contracts issued by insurance companies. They are not bank deposits, are not FDIC insured, are not insured by any federal government agency, and may lose value depending on the type of annuity selected.
Guarantees are subject to the terms of the contract and the claims-paying ability and financial strength of the issuing insurer. Withdrawals may be subject to surrender charges, ordinary income tax, and, if taken before age 59½, an additional federal tax penalty.
Product availability, features, rates, riders, and guarantees vary by insurer and state. This information is general in nature and does not constitute tax, legal, investment, or financial advice. Actual contract terms control.