How Do Annuities Work?

If you’ve never heard of annuities, you may now be wondering how they work. Here’s everything you need to know about annuities

What Are Annuities?

Annuities are financial products that provide policyholders with a guaranteed income stream later in life. They are usually designed for people who are planning for retirement. Though, some people do purchase and use annuities while they are still young. 

Annuities grow over time, sometimes based on the performance of a market index or fund. How your annuity grows is dictated by the type of annuity you purchase. When you go to buy an annuity, you’ll have to choose between fixed and variable annuities. 

Here’s the difference.

Fixed Annuities

Fixed annuities provide regular periodic payments to the annuitant or policyholder. They have less risk, and the income stream you receive is effectively guaranteed. Fixed annuities are best for people who want to minimize the impact that market fluctuations can have on their future income stream. 

Variable Annuities

Variable annuities are tied to investments made in an annuity fund. The performance of these investments impacts the value of the annuity. If the fund performs well, you’ll receive higher payments in the future. If the fund doesn’t perform well, you’ll receive smaller payments. This option may lead to less stable cash flow in the future, but it also offers annuitants the option to garner strong returns from their fund’s investments. 

How Do Annuities Work?

Annuities have two phases. During the accumulation phase, the annuitant funds the annuity. Any money invested in the annuity then grows on a tax-deferred basis. 

The annuitization phase happens next. During this phase, payments commence. 

Your annuity can either be immediate or deferred. If it’s immediate, the accumulation phase is taken out in exchange for a lump-sum payment. Deferred annuities are paid over time and grow on a tax-deferred basis. 

Do You Need An Annuity?

If you aren’t sure whether or not you need an annuity, contact Carolina Senior Benefits. We’ll help you determine if an annuity is the right choice for you. 

To reach one of our representatives, please call 704-765-4689.