In recent years, annuities have gained popularity with investors looking for a safe place to park their hard‑earned money. Below are several common advantages annuities can offer.
Safety and Security. Annuities offer safety and security. A fixed annuity will have guaranteed rates, so your principal is protected regardless of market swings.
For guaranteed-rate options, see Fixed Annuities. Equity-indexed annuities let you participate in some stock market gains while protecting you from losses.
Equity-indexed options can be explored in more detail at Indexed Annuities. These products typically provide a minimum guaranteed return while offering upside tied to an index.
Because annuities are issued by life insurance companies, you can review third-party ratings from sources such as Moody's or A.M. Best to assess financial strength. Insurance companies issuing annuities are reserve companies and must maintain funds to meet contractual obligations. Depending on state rules, some annuity assets may receive limited creditor protection.
Tax Deferred. What you earn is important, but what you keep is often more important. Annuities are tax deferred, meaning you generally do not pay taxes on interest until you withdraw earnings.
Tax deferral can accelerate growth because interest accumulates on funds that otherwise would have been paid as taxes. You will typically pay ordinary income tax on the earnings when withdrawn.
Yields. Annuities feature competitive, market-based interest rates and have historically offered returns that compare favorably with many taxable savings vehicles.
Liquidation. Many annuities include withdrawal provisions that allow access to some value without surrendering the entire contract. Contracts may offer living benefits or access in certain circumstances, such as prolonged illness or long-term care needs.
If you have questions about access, surrender charges, or how annuitization works, talk to an agent to review options that fit your situation.
Estate Planning. Annuities can transfer directly to named beneficiaries and often avoid probate and related delays or costs. Naming a primary and contingent beneficiary gives flexibility in how benefits are passed on.
When a named beneficiary receives annuity gains, those gains are typically taxed as ordinary income to the beneficiary. Properly structuring beneficiary designations can help meet your estate-planning goals while preserving privacy and reducing administrative steps.
* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims-paying ability of the issuing insurance carrier.
Frequently Asked Questions
What is the main benefit of an annuity?
An annuity can provide principal protection and tax-deferred growth, helping you preserve savings and defer taxes until withdrawal.
Are annuity earnings taxed differently than other investments?
Earnings from annuities are generally taxed as ordinary income when withdrawn, unlike long-term capital gains rates that may apply to some investments.
Can I access money in an annuity if I need it?
Many annuities allow partial withdrawals or offer living benefits, but contracts may include surrender charges or limits, so review terms carefully.
Do I need to go through probate for annuity proceeds?
No—if you name a beneficiary, annuity proceeds typically transfer directly to that person and avoid probate procedures.