Annuities are an insurance contract that offers steady retirement income. You can choose among several types of annuities, but which one is the best? Learn more about the best annuities.
1. Best Immediate Annuity: MassMutual RetireEase
This annuity product offers a lot of flexibility. You have up to 12 months to start receiving an income. You can opt for inflation protection to increase your income payments by 1% to 4% annually.
If you choose a period certain annuity option (payments for a set period of time), you can increase or decrease the period (subject to the terms of your contract). The minimum premium for this annuity is $10,000.
MassMutual has been in business for more than 160 years. It has A++ ratings from AM Best.
2. Best Fixed Annuity: New York Life Secure Term MVA Fixed Annuity II
New York Life Insurance Company has been in business for over 170 years, making it an excellent choice for annuities. This fixed deferred annuity allows you to choose an interest rate guarantee period of 3 to 7 years.
This product also offers a market value adjustment (MVA), which means New York Life could potentially provide a higher interest rate based on a set formula when you surrender your policy or make a withdrawal.
3. Best Indexed Annuity: Brighthouse SecureAdvantage 6-Year Fixed Index Annuity
This product provides protection from market downturns while providing more potential growth than a fixed-interest-rate product.
With this annuity, growth is tied to your choice of 2 market indices: the S&P 500 or Russell 2000 Index. How much you earn is based on either a cap rate, which is the maximum you can earn, or a participation rate, which is a percentage of the growth. You can check the performance of your annuity at any time.
Brighthouse has an A rating from AM Best and more than 2 million customers.
4. Best Variable Annuity: Fidelity Personal Retirement Annuity
This annuity allows you to choose from over 55 Fidelity funds. You can choose a more hands-off approach by picking a targeted portfolio that meets your goals. You can also pick and choose among a combination of funds or invest by sector.
Fidelity charges 0.25% for contracts purchased with an initial investment of less than $1 million and 0.10% for contracts purchased with an initial investment of $1 million or more.
Fidelity is a well-guarded company managing $9.8 trillion in customer assets.
5. Best for Couples: Pacific Income Provider
This fixed, immediate annuity offers a variety of income options for couples. It offers period certain, life only, life with period certain, life with a cash refund and life with an installment refund.
Life with cash refund means that after both annuitants die, anything remaining is paid as a lump sum to beneficiaries. Life with installment means that after the death of both annuitants, anything remaining is paid in installments.
Pacific Life, the company behind the Pacific Income Provider, has been in business for more than 150 years and is designated as one of the 2020 World’s Most Ethical Companies by the Ethisphere Institute.
What is an Annuity?
An annuity is an insurance policy. You pay an insurance company, and in exchange, the insurance company guarantees an income for life. You might pay 1 lump sum or you might make ongoing premium payments. You can receive the income immediately or you can wait and receive it in the future.
If you die before receiving payments, your beneficiary receives a death benefit. Some annuity payout options also allow you to pass payments or a lump sum on to your beneficiaries.
Annuities allow for tax-deferred growth. That means that you don’t pay taxes on any interest you earn until you withdraw the funds.
There are a few types of annuities:
- Fixed deferred annuity: With this type, insurance companies pay you an interest rate. There’s typically a minimum interest rate, and your annuity may earn more. Rates are usually fixed for a year at a time. There may be a higher introductory rate.
- Indexed deferred annuities: With these annuities, the interest rate you earn is based on an index like the S&P 500. Indexed annuities typically have a participation rate or a cap rate. A participation rate means you earn a percentage of what the index earns. If you have a 50% participation rate and the index earns 8%, you would earn 4% interest for that year. A cap is an interest rate maximum. If your annuity has a cap of 7% and the index earns 8%, you would earn 7%.
- Variable deferred annuities: With this type of annuity, the premium you pay is invested. You may earn money or lose money based on market performance.
- Immediate annuities: With this option, you receive payments right away. You choose whether you want income for the rest of your life, income for a certain period or another payout option.
Pros and Cons of Annuities
Here are the benefits and drawbacks of annuities.
One of the most stressful aspects of retirement is knowing whether you have enough income to last. An annuity pays a guaranteed income, which can help provide peace of mind.
Since an annuity is an insurance contract, you don’t have to worry about complications after you die. It goes to your beneficiaries.
Paying taxes on your money as it earns interest means there’s less money. Tax deferral allows you to maximize your earnings.
The many types of annuities make it easy to find one that fits your financial preferences and your needs.
Indexed and variable annuities are complex products. If you’re considering a particular product, don’t hesitate to ask questions and consider consulting a trusted advisor.
Annuities come with fees. There are surrender charges if you decide to withdraw funds early in your contract. If you have a variable annuity, you typically pay fees for fund management.
Limited Access to Funds
Once you purchase an annuity, you have limited access to funds. With an immediate annuity, your payments are set. You can’t change your mind and ask for a lump sum back.
With deferred annuities, you can typically withdraw up to 10% a year without a surrender charge. Any withdrawals beyond that will have a surrender charge. Surrender charges may be waived in some circumstances and may be in place for the first several years of your contract.
Life Insurance vs Annuities
Life insurance pays your beneficiaries a lump sum after you die. Annuities pay you income while you’re living, and the payouts may continue to your survivor or beneficiaries depending on the payout option you chose. If you die before starting your annuity payments, the balance of your account will go to your beneficiaries.
Commissions and Fees
Annuities have surrender charges, as discussed above. A variable annuity will typically have a management fee. You may also be charged fees if you switch from one type of investment to another. Certain features like inflation protection may also bring about additional fees.
Is an Annuity Right for You?
Annuities can be a powerful tool for retirement planning. Review your options carefully, and consult a trusted advisor if you’re uncertain which option is right for you. The right annuity can ensure you have enough income for the duration of your retirement.
Frequently Asked Questions
How much does a $100,000 annuity pay per month?
Unfortunately, there’s no set answer to this question. It depends on the type of annuity and, if it’s a deferred annuity, how it performs.
Who should not buy an annuity?
You should not buy an annuity if you anticipate needing the money in the short term. This is because annuities have surrender charges in the first years.