Understanding Annuities and the Impact on Financial Planning

An annuity is a contract with an insurance company in which you make one or more payments in exchange for a future income stream in retirement. The funds in an annuity accumulate tax deferred, regardless of which type you select. Because you do not have to pay taxes on any growth in your annuity until it is withdrawn, this financial vehicle has become an attractive way to accumulate funds for retirement. Annuities can be immediate or deferred, and they can provide fixed returns or variable returns.

Fixed Annuities


A deferred fixed annuity is an insurance-based contract that can be funded either with a lump sum or through regular payments over time. Fixed annuity contracts are issued with guaranteed minimum interest rates. Although the rate may be adjusted, it should never fall below a guaranteed minimum rate specified in the contract. This guaranteed rate acts as a “floor” to potentially protect a contract owner from periods of low interest rates. The funds in your fixed annuity are able to build and earn interest during the accumulation phase. You don’t have to pay taxes on interest earned until it is withdrawn. By postponing taxes while your funds accumulate, you keep more of your money working and growing for you instead of paying current taxes. This means an annuity may help you accumulate more over the long term than a taxable investment. Earnings that are withdrawn are taxed as ordinary income. Fixed annuities provide an option for an income stream that could last a lifetime. The guarantees of fixed annuity contracts are contingent on the financial strength and claims-paying ability of the issuing insurance company.

Fixed Index Annuities

A fixed index annuity is a long-term savings option that gives protection in a bear market.

Fixed index annuities create a stream of lifetime income and provide the ability to earn interest, based in part on the performance of the specified index, without the risk of loss of premium due to market downturns or fluctuation of a contractual floor.  A fixed index annuity may be a good choice if you’re looking for some level of growth or income potential that’s protected from market loss.

Interest is credited to an index account based in part on the performance of an external index, such as the Dow Jones or Standard & Poor’s 500 Index®. The performance of the index over a specific time frame helps determine the interest credited to the annuity.

You can enhance the products by adding additional riders, such as a lifetime income rider.  These do come with additional costs. 

Fixed index annuities protect your contract value from market loss, whether you focus on asset growth or lifetime income. In years where there is little or no interest credited, however, the costs for riders such as a guaranteed lifetime withdrawal benefit may slightly decrease contract value.

Variable Annuities

A variable annuity is a contract that provides fluctuating (variable) rather than fixed returns. The key feature of a variable annuity is that you can control how your premiums are invested by the insurance company. Thus, you decide how much risk you want to take and you also bear the investment risk. Most variable annuity contracts offer a variety of professionally managed portfolios called “subaccounts” (or investment options) that invest in stocks, bonds, and money market instruments, as well as balanced investments. Some of your contributions can be placed in an account that offers a fixed rate of return. Your premiums will be allocated among the subaccounts that you select. Unlike a fixed annuity, which pays a fixed rate of return, the value of a variable annuity contract is based on the performance of the investment subaccounts that you select. These subaccounts fluctuate in value with market conditions, and the principal may be worth more or less than the original cost when surrendered. Variable annuities provide the dual advantages of investment flexibility and the potential for tax deferral. The taxes on all interest, dividends, and capital gains are deferred until withdrawals are made. When you decide to receive income from your annuity, you can choose a lump sum, a fixed payout, or a variable payout. The earnings portion of the annuity will be subject to ordinary income taxes when you begin receiving income, and may be subject to surrender charges plus a 10% federal income tax penalty if made prior to age 59½. Surrender charges may also apply during the contract’s early years.

Immediate Fixed Annuities

Typically, an immediate annuity is funded with a lump-sum premium made to the insurance company, and annuity payments from the insurer begin within 30 days or can be deferred up to 12 months. Payments can be paid monthly, quarterly, annually, or semi-annually for a guaranteed period of time or for life, whichever is specified in the contract. Only the interest portion of each payment is considered taxable income. The rest is considered a return of principal and is free of income taxes.

How are Annuities Used in Financial Planning?


Annuities have contract limitations, fees, and charges, which can include mortality and expense risk charges, sales and surrender charges, investment management fees, administrative fees, and charges for optional benefits. Annuities are not guaranteed by the FDIC or any other government agency; they are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company. Variable annuities are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.


Annuities come with different options, making it important to understand the basics of each to place your money in the right one for your investment needs. Deciding on which annuity is right for your financial plan can be done with the help of an experienced professional at BLU Financial Planning. We understand the ins and outs of financial planning with annuities and can generate a plan tailored to your needs. Reach out to a team member today for more information.

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