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Annuity is a type of life insurance policy offered by life insurance companies which provides certain guarantees on your money - including paying a lifetime income regardless of how long you live. However, when buying an annuity it is important to do so in context of a comprehensive financial plan.

Simplifying Annuities for Black Retirees & Pre-Retirees

According to the life insurance trade association LIMRA, in 2022 annuity sales skyrocketed to a record $310 billion.  However, annuities have existed for over 2000 years and are commonly used today. Retirement pensions, structured settlements, and lottery winnings taken as periodic payments all function as “annuities.”

Types of annuities

One defining characteristic of a annuity is when the income payment to the annuitant begins. Income payments to the annuitant may begin immediately or in the future.

Immediate
Annuity

Also known as a Single Premium Immediate Annuity

these policies are funded with a pre-tax [retirement funds: 401k, IRA, TSP] or after-tax [personal savings] single lump sum deposit. Income payments from this annuity may begin as soon as 30 days after the deposit.

Deferred Annuity

Also known as a Single Premium Immediate Annuity

However, Income payments begin  at some point in the future. Deferred annuities have two phases – the growth phase and the income phase. During the growth phase funds in the contract earn interest. You are also allowed to make additional deposits into the contract during this time. These policies offer multiple payout options including lifetime income or period certain income

How do annuities earn money?

Growth within the annuity may be Fixed, Variable, or Indexed

Fixed Annuities

You earn a pre-determined amount of interest each year. The interest rate you earn in the policy is set by the life insurance company which typically offers “minimum guaranteed” interest rate. Furthermore, funds deposited into the policy are principally protected with additional protections provided by the State Guarantee Associations

Variable Annuities

The funds within the policy are invested directly in stock market sub-accounts. Your account growth depends on the performance of these “sub-accounts.” Because these accounts are “variable” it is possible to lose money in a Variable Annuity.

Indexed Annuities

Your account performance is based on the performance of a stock market index but funds are not directly invested in the stock market; if the index performs well, the account grows but if the underlying index declines, the annuity does not lose value. Instead, the account simply earns 0% for that time

Pros and Cons of Annuities

The “Cons”

  • Long-Term Commitment. Contract periods can be 5 years – 15 years
  • You always have access to your money, however If you withdraw more than 10% of your account value during the contract period, you must pay the withdrawal charge.
  • Fees (Variable Annuities Only). Variable annuities have many annual charges and fees which can total 3% + of the account value each year.

The “Pros”

  • Tax-deferred growth. You only pay taxes when you withdraw money.
  • Principal protection (with fixed and indexed annuities). Both your deposit and gains [earnings] are contractually guaranteed. You can not lose money.
  • Lifetime Income. No matter how long you live, you never have to worry about running out of money. “Income Security” provides a much-needed peace of mind as you age.

Should You Buy an Annuity?

Before buying an annuity, it is important to evaluate the choice in context of your long-term financial objectives. At The Black Wealth Company we are annuity and life insurance experts who specialize in simplifying personal finances for the Black community. To schedule a free annuity consultation, click the link below.

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