The purpose of an annuity is to provide a steady stream of income at a future date. Although all annuity contracts share this basic structure, they range from simple to complex. Some annuities are designed to supply retirement income, while others offer tax advantages, employee benefit plan options, and excellent accumulation benefits. This will briefly reviews annuity basics, features, benefits, riders, and hybrid models with an emphasis on product suitability, client best interest standards, and adviser fiduciary responsibilities.
Originally, annuities were simple products designed to pay an income stream to an annuitant based on a lump sum of money deposited with the insurance company. Eventually, annuities designed to help accumulate retirement savings over time where introduced. Annuities are now used as tax-deferred accumulation products, as well as income-paying products, creating a future retirement income stream.
Annuity products contain unique features and lifetime income benefits designed to help individuals achieve their financial goals. Professionals licensed to sell, solicit, or negotiate annuity contracts are responsible for guiding their clients in selecting the contract benefits that suit their needs. They must also evaluate the costs against their clients’ financial risk tolerance and the desired outcome.
General Types of Annuities
- Variable annuities have the greatest potential for growth but have a high risk of loss to the contract value.
- Registered indexed-linked annuities (RILAs) have reduced risk and growth compared to traditional variable annuities and greater growth potential and risk compared to fixed annuities.
- Traditional fixed annuities are the most conservative. They may not grow the accumulated value as rapidly. However, the fixed annuity could still end with a greater cash value than a variable annuity that is started at the same time with the same amount of premium, based on how the securities markets performed.
- Fixed indexed-annuities share characteristics of both fixed and variable annuities. Their guarantee against the loss of principal value and accumulated earnings due to negative market performance is tempered by a small minimum interest guarantee as well as other performance-limiting contractual terms. A fixed annuity could still outperform the fixed-indexed annuity in the long run, depending on interest rates, market performance, and volatility.
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