February 24, 2023 // All
A concept like life insurance is fairly self-explanatory. Just look at the name: you’re insuring your life against the unknown or unexpected and helping provide financial protection to the beneficiaries who may count on you. There are many facets beyond that, but that is a reasonable basic understanding.
With annuities, on the other hand, the definition isn’t quite as obvious from the name. Thankfully, you won’t need an advanced degree to understand them, and by the end of this article, you’ll have a good idea if it makes sense for your situation, and learn when you may want to start one (spoiler alert: right now is a really good time).
An annuity is a financial product that can only be offered by life insurance companies like AAA Life, focused on helping you prepare your money for your retirement. You can either make a one-time payment, or contribute a series of smaller payments over a longer period of time, which gain interest and are then paid back to you.
Here’s where an annuity becomes a truly unique opportunity: these payments can last the rest of your life! Even once you’ve had your contributions (and the earned interest) returned to you, the insurance company is obligated to continue making the same payments. This makes for an excellent source of retirement income and added security.
If you’ve ever heard, or possibly had your own concerns, about outliving your retirement savings – that is precisely what an annuity can help with.
Much like with life insurance payouts, there is a wide range of reasons you might want an annuity. In addition to providing a guaranteed income stream, annuities can help with end-of-life planning, as the proceeds can also be left to beneficiaries who may depend on you financially.
In a 2022 survey from the Life Insurance Market Research Association (LIMRA) on how buyers intended to use their annuities, nearly half of respondents indicated they would use their annuities to supplement social security or pension income in retirement. Other common responses included accumulating assets for retirement, receiving a lifelong income stream, covering basic living expenses (like food, housing and utilities), leaving more money behind for heirs or charities, or paying for discretionary expenses (such as traveling, dining out and other entertainment) in retirement1.
If you’ve considered an annuity before and held off, this is a great time to look again. The interest rate rose sharply throughout 2022, making annuities a more enticing option than the previous few years.
According to Investor’s Business Daily, lifetime fixed-income annuity payments were up as much as 30 percent in 2022 over the previous year – compared to the Dow Jones Industrial Average, which had fallen nearly 20 percent in the same span2.
An annuity can protect you from the uncertainties of the financial market and could help you benefit during times of inflation. Fixed annuities offer a guaranteed rate of return, and index annuities offer a minimum guaranteed interest rate (meaning you will never earn less than a set percentage of interest), where other options (like a 401K or traditional IRA) can expose you to market loss.
AAA Life offers a number of annuity products that can be tailored to your specific situation. Annuities can be started with as little as $3,000, and they help grow your money tax-deferred – meaning you pay no taxes until you take the money out. Some annuity products will lock in your interest rate for a year or longer, on top of additional first-year bonus interest, to help kickstart your annuity towards your financial goals.
If an annuity sounds right for you, read more on our annuity product page to compare options or call an experienced agent today at (888) 422-7020 who can help navigate you through the process.
1Drinkwater, Matthew. The Why and How of Deferred Annuity Buyers. LIMRA. November 2022.
2Doler, Kathleen. How Does A 7% To 8% Payout For Life Sound? Investor’s Business Daily. Sept. 30, 2022.
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