An annuity is an insurance contract typically used in retirement planning and designed to protect an individual from outliving his or her assets. An individual, or annuitant, pays premiums into the annuity and the insurer promises to pay out money from the annuity to the annuitant or a beneficiary in a series of payments.
An annuity is not a savings account. An annuity should be purchased to reach long-term financial goals. Most annuities have surrender or withdrawal charges to discourage people from taking money from an annuity or ending (surrendering) the contract prior to retirement.
Types of Annuities
Deferred Annuities
A deferred annuity is designed for long-term growth, with payouts starting at a later date. This allows funds to grow tax-deferred until you’re ready to withdraw. You invest money that grows over time, with payments beginning years later (such as in retirement).
This option is ideal for those who want to accumulate funds for future income.
Immediate Annuities
An immediate annuity begins payments almost immediately (usually within a year of purchase). It’s designed for retirees who need income right away. It works by paying a lump sum upfront, and the insurance company starts sending you regular payments based on your chosen payout option, such as a lifetime or fixed period.
This is ideal for retirees looking for immediate and guaranteed income.
Indexed Annuities
An indexed annuity combines features of both fixed and variable annuities. Your returns are linked to a stock market index, such as the S&P 500, but losses are limited by a guaranteed minimum return. Your money earns interest based on the performance of a market index, but with protections against losses.
This is ideal for consumers who want some market exposure with downside protection.
Variable Annuities
A variable annuity allows you to invest your premiums in a variety of investment options, typically mutual funds. Your payout depends on the performance of those investments. Your payments and future income vary based on market performance. Some variable annuities offer optional riders that provide income guarantees.
This is ideal for investors comfortable with market fluctuations who want the potential for higher returns.
Fixed Annuities
A fixed annuity provides guaranteed interest earnings and predictable payments over time. It’s similar to a certificate of deposit (CD) in that it offers a stable and low-risk return. You deposit money, and the insurance company guarantees a set interest rate over a specified period.
This option is ideal for individuals looking for a secure, predictable income with minimal risk.
Considering an Annuity?
Annuities can be a valuable part of a retirement plan, but they’re not for everyone. Consider your financial goals, risk tolerance, and retirement needs before purchasing one. It’s always a good idea to consult with a licensed financial professional or agent to understand your options.
Protect Yourself from Fraud
Annuities are long-term commitments, so it’s important to work with a reputable insurance provider. Watch out for high-pressure sales tactics, misleading promises, or unclear contract terms. If it seems too good to be true, it probably is.
If you suspect fraud or would like to verify a company or agent, contact us.
Tips for Buying Annuities
If an annuity is the right choice for you, keep these tips in mind when shopping:
- Compare Your Options. Annuity benefits, fees, and guarantees can vary widely between companies. Shop around and compare offers before making a decision.
- Know Your Risk Tolerance. Fixed annuities offer guaranteed returns and lower risk, while variable annuities have the potential for higher earnings but come with more risk. Be cautious about putting all your assets into an annuity.
- Verify Licensing. Make sure the insurance company and agent selling the annuity are licensed in North Dakota. You can check licenses by visiting our License Search or calling the North Dakota Insurance Department.
- Take Your Time. Don’t feel pressured to make a quick decision. Take the time you need to fully understand the product and whether it fits your financial goals.
- Bring a Trusted Person. Consider bringing a family member or friend when meeting with an agent to ensure you feel comfortable with your decision.
- Understand the Product. Consult a financial advisor or tax professional to evaluate how an annuity fits into your financial plan and to understand any tax implications.