Test Your Annuity IQ

Keystone Financial Group |

Annuities come in many different shapes and sizes, and it's helpful to know the difference if you're planning to add them to your financial portfolio. Grab your thinking cap, and let's test your understanding of annuities by examining some of the most common questions we hear about this financial tool:

How many types of annuities are there?

Currently, there are approximately 12 main types of annuities, which are immediate, variable, fixed, fixed-indexed, long-term care, two-tiered, QLAC, secondary market, structured settlements, Medicaid, charitable gift, and deferred income annuities. Each type of annuity has its own unique features and benefits, so lumping all annuities together is like comparing apples, oranges, and kumquats! Some annuities offer tax benefits, some have surrender charges, other have different types of fees or riders. Be sure you understand exactly which type of annuity is being discussed before you make a decision, so that you know which of these would be best for your needs and goals before purchasing one.

What's the best age to buy an annuity?

Typically, the best age to purchase an annuity is age 40 or older, depending on the annuity's intention and the targeted age of retirement. The contract owner will then have enough time to accumulate savings before retirement, and calculate how much income could be generated from an annuity's income rider (or provided by annuitizing) at the targeted retirement age.

Are annuity payments taxable?

In most cases, annuity payments are taxable to the recipient. However, Structured Settlements and Roth IRA annuity payments are tax-free.

What are annuity fees?

Fees reduce the value of an annuity. They help cover the insurer's costs to sell and manage the annuity and pay benefits. The insurer may subtract these costs directly from the annuity's value. Most annuities have charges, but they can vary substantially for different annuities, so be sure you read the fine print and discuss any fees and expenses in detail with your financial professional to understand how the fees work when purchasing an annuity.

What is the exclusion ratio?

A fraction is used to determine the amount of annual annuity income that is exempt from federal income tax. The exclusion ratio is the total contribution or investment in the annuity divided by the expected ratio.

How do annuities pay out?

Annuities can pay out in two distinct ways: annuitization (an irrevocable payout) or Guaranteed Lifetime Withdrawals (revocable payout) from an optional income rider. Not all annuities have income riders, so be sure to discuss with your financial professional who can help you decide whether a rider is appropriate for your needs and goals.

How do annuities work at death?

While the different types of annuities can vary in this regard, in general, with deferred annuities, beneficiaries will receive the remaining annuity's accumulation value in one lump sum if the annuitant did not start the annuitized annuity payments. Annuitized retirement plans may or may not have a death benefit, depending on the annuity.

How do joint annuities work?

Internal Revenue Code (IRC) Section 72(s) states that the death of either joint owner on an annuity policy triggers the death benefit on a jointly owned annuity. Regardless of which joint owner passes away first, the surviving joint owner can receive the death benefit as the primary beneficiary. This can be a very important benefit for married couples, especially if one spouse has substantially fewer resources to rely on for retirement income than the other.

As you can see, the answer to many annuity questions is, "it depends!" Not all annuities are created equal, and each type has specific purposes that may or may not be suitable for your individual needs. Before purchasing an annuity, you should make sure to consult with a qualified financial professional who can fully assess your situation and provide access to the best options to meet your specific needs and goals. (Check out this article for a few unique benefits that annuities can provide.)

Want to discuss your options and see if an annuity may be right for you? Contact our office to learn more...




All financial products, including annuities, have both potential risks and potential benefits. Before purchasing an annuity or other financial product, you should consult with a qualified financial professional who has in-depth knowledge of the product(s) in question, as well as your financial situation and goals, and can provide detailed guidance to help you understand the financial product in question.

This content is developed from sources believed to be providing accurate information. This information is for educational purposes only and should not be construed as legal or tax advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Neither the information presented here nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products. Guarantees are subject to the claims-paying ability of the issuing insurance company.


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