While annuities can be good investment choices for people of all ages, they are often used as a form of insurance that protects retirees from living too long and running out of income from retirement savings. With only their retirement savings and Social Security to support them, retirees are in a tough position, but annuities give them the opportunity to create another form of regular, predictable income.
The principal paid to an annuity contract can earn interest that is either fixed or variable. A fixed annuity is one that pays a guaranteed interest rate. A variable annuity will have subaccounts for the annuity owner to select from. These subaccounts will perform just as their underlying investment do—which means they could gain or lose money for the owner. Index annuities have subaccounts that are designed to mimic the performance of various stock indexes (such as the S&P 500) and have minimum interest guarantees along with caps for the maximum amount of earnings the annuity can gain.
There are many ways to structure the benefits that annuities give. For example, one might:
- Select a straight life annuity. With a straight life annuity, the owner or annuitant receives a set payment for life even if the payment outlay exceeds the principal.
- Choose a joint and last survivor annuity. Joint and last survivor annuities pay out a benefit over the lifetime of joint annuitants.
- Add a guaranteed income rider. Once triggered, a guaranteed income rider can pay out a specified income for the life of the annuity owner, no matter how much it earns in gains.
- Choose a term certain annuity. For smaller payments paid out over a guaranteed time frame, even if the annuitant passes away during that time, one can choose a 10-pay or other term certain annuity.