Understanding Annuities

Annuities can be complicated products and understanding the benefits and drawbacks are important in constructing your financial plan.

A simple explanation

An annuity is an insurance product that pays out income. Here's how it works: you make an investment in an annuity, and then that investment makes payments to you at a future date. The size of the payments you receive is determined by how much you put in, and the length of time you contributed to the annuity.

But that is where simplicity ends. Annuity products are some of the most expensive and complicated investments in the marketplace.

Many people think annuities are a good addition to their retirement plan, but there are some downsides to them. It’s important to realize that the benefits you receive with an annuity come at a price. Annuities typically have higher fees than other retirement-savings vehicles, often including a mortality and expense charge, surrender charge for early withdrawal, administrative fee and an investment management fee. It’s important to have a solid understanding of annuities before investing in them.

All annuities are not the same

There are different types of annuities all with different features, costs, provisions, restrictions and fees. What is true in all cases is that you are handing over the control of your money and it can be very difficult and expensive to change your mind and get your money back.

Types of annuities

What is a fixed annuity?

Offered by insurance companies through an insurance contract.  The insurance company guarantees a minimum rate of return on your funds and the payout. These contracts are regulated by the California Department of Insurance. 

What is an equity indexed annuity?

Offered by insurance companies through an insurance contract. These investments provide a minimum guaranteed interest rate combined with an interest rate linked to a market index. These are complex investment vehicles with often opaque interest and payout calculations and surrender fees. Equity index annuities are not regulated by the SEC or FINRA. Read the FINRA investor alert on equity-indexed annuities at www.finra.org

What is a variable annuity?

Offered by insurance companies and allows you to invest in mutual funds through an insurance contract. As the name implies, the rate of return is variable, meaning it varies with the returns of the mutual fund(s) you have selected. These contracts are regulated by the SEC and FINRA. Fees are paid to both the mutual fund company and the insurance company for insurance provisions.


What happens when you try to withdraw from an annuity?

Most annuities charge surrender fees. These are basically deferred sales fees that are charged when you sell, rather than when you buy, an investment. There are a few providers that offer annuities with minimal or no surrender fees. More typically, annuities have a surrender schedule that lasts six or seven years. The fee may start at about 6% or 7% initially, then decrease each year until it reaches zero. Some have much higher fees and/or longer terms. Watch out for those plans!


Fees, fees & more fees

Be sure you investigate all charges and surrender fees involved with an annuity or any other investment. Ask for the information in writing, and be sure you understand it. Some annuity contracts have very dense and confusing language. The bottom line: If you don't understand it, don't buy it.

Why do some annuities pay a bonus?

Some annuities offer a "bonus" upfront. However, this generally just means that you are getting paid some future interest early on. So you may be giving up future interest for the so-called bonus. Be sure you understand how the bonus feature works. Don't get locked into a high-fee fixed annuity simply because of the bonus feature.

CTA & Annuities

CTA does not promote annuities as investment options for 403(b) or 457 plans. These complex and expensive investments are not consistent with CTA's mission of helping educators have a secure financial future.

What to do if you are in an annuity?

Many annuities have high surrender charges and other fees associated with making an exchange to a different type of savings plan. Before you do anything, understand your plan options you can go to https://www.403bcompare.com.