There is a lot of confusion regarding the safety and security that an annuity can provide. In its most basic terms, an annuity is a contract sold by insurance companies, normally designed to provide variable payments to the holder at designated time periods in the future. The annuity can accumulate over time, and the annuity owner is taxed only when funds are removed. Because of this tax deferral, annuities are purchased normally for retirement.
The most common annuity is a Fixed Annuity, which normally guarantees a minimum yield, the funds on deposit, and guarantees of future fixed income retirement options.
Annuities are guaranteed by the insurance company that sells or issues the annuity, and they vary greatly based on each individual State Department of Insurance. In addition to regulating insurance companies, the state of residence of the annuity owner may also provide an overall financial guarantee. These guarantees are variable from state to state with ranges from $100,000 to $500,000 per annuity owner. This provides protection to the annuity owner should an insurance company become insolvent.
Guaranteed Minimum Yield:
This annuity guarantee provides a fixed guaranteed minimum the annuity owner will be able to count on. The actual amount of guaranteed yield state to state is variable, but a reasonable interest rate to expect is 3%. Individual states allow for lesser or greater rates of returns to be the underlying guarantee.
Guarantee of Income Deposits:
All fixed (or indexed) annuities provide 100% guarantee of funds deposited. Your funds in a guarantee annuity are fully protected against loss of your original deposit regardless of any outside condition.
Guarantee of Settlement Or Income Options:
Settlement options (how you withdraw your funds) can include you, your spouse and your heirs, and can be customized to fit almost any situation with lifetime income options. These options can often also include a guaranteed rate of yield in the calculation of the income benefit. Most annuity contracts have multiple options for settlement for you to choose from. Your right to remove your annuity funds in a pre-set formula as income is contractually guaranteed.
Underlying Income Guarantee:
Besides being guaranteed by the insurance company issuing the annuity, annuities have the additional underlying guarantee by the State of residence of the annuity owner. These guarantees, known as State Guarantee Funds, set aside funds to assure the consumer the insurance company is solvent and that their funds are protected. The amount of guarantees offered to the annuity owner varies from state to state but they normally range from $100,000 to $500,000 per annuity contract. Contact your state department of insurance for specifics of state guarantees on fixed income.
Disclaimer: Annuities are not for everyone. Please seek professional advice regarding tax liability and investing options based on your personal situation.