Annuities

What it is built for

Annuities come in several shapes — fixed, fixed indexed, and others — that differ in how the value grows and what is guaranteed. All of them are contracts with an insurance company, and the guarantees they carry are backed by the financial strength and claims-paying ability of that company.

The core trade in an annuity is liquidity for certainty. In exchange for guarantees, you generally accept limits on when and how much you can withdraw during a surrender period.

Often a fit when

• Retirement is close, or already here, and outliving savings is the concern
• Some portion of savings should produce predictable income rather than fluctuate
• The money will not be needed in a lump sum during the surrender period
• The trade-off of liquidity for guarantees is understood and acceptable

What to look at closely

• The surrender period and surrender charges. How many years, and what it costs to get out early.
• Free withdrawal provisions. How much is accessible each year without a charge.
• Which guarantees are contractual and which are optional riders that carry an ongoing fee.
• How income is calculated if and when you turn the contract into a payout.
• Tax treatment. Withdrawals are generally taxable and may carry a federal penalty before age 59½. Ask your own tax advisor.

Compare with

If this is not quite the right shape for what you are protecting, one of these probably is.

• Term life — The cheapest way to cover a fixed window — a mortgage, or the years until the children are grown. It expires, and it builds no cash value.
• Final expense — A small permanent policy sized to a funeral rather than to an income. Easier to qualify for with health history, and it does not expire.
• Whole life — Costs more per dollar of death benefit than term, but the premium is fixed for life and the coverage never ends.
• Indexed universal life — Permanent coverage whose cash value tracks an index within a floor and a cap. More moving parts than whole life, and it needs reviewing over time.