10 Things to Know About Annuities

Once you know what it means, "annuity" can be a very beautiful word, conjuring visions of income being delivered to you regularly, very possibly for the rest of your life. Most of us would do well to learn more about annuities and to consider including them as part of our overall retirement plans.

Here's a brief introduction to annuities, along with 10 key things to know about them.

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What's an annuity?

An annuity is essentially a contract between you and an insurance company, with the insurer promising to deliver regular income to you (or, possibly, a future lump sum amount) in exchange for your paying them a significant chunk of change.

Before getting into more details, the table below can give you a rough idea of the amount of income you might receive from an immediate fixed annuity if you spend $200,000.

Source: immediateannuities.com.

As you can see, there's significant income to be reaped from annuities. Consider that the average Social Security retirement benefit was $1,913 per month as of March, or $22,956 on an annual basis. You might more than double that with an annuity -- or, if you spend enough, an annuity might provide the retirement income stream you need to fully meet your needs.

Things to know about annuities

Here are some key things to know about annuities:

1. There are different kinds of annuities. Fixed annuities are the most straightforward kind, offering defined payments for a defined period, while variable and indexed annuities can be more complex and sometimes risky and/or problematic, due to fees and restrictive terms.
2. The income an insurer can offer you is largely dependent on prevailing interest rates. So in our current period of relatively high rates that are generally expected to fall in the coming year or two, this would be a fairly good time in which to buy an annuity.
3. Women will generally be quoted lower payment amounts, because they generally live longer than men, which can have insurers making payments for a longer period.
4. You can structure the annuity you buy in lots of ways. For example, it can start paying you immediately or on a deferred basis -- perhaps starting in five or 10 years. (Such deferred annuities can help you not run out of money later in life.) And it can pay you for a certain number of years or for the rest of your life.
5. You can also have a joint annuity, which can pay you for the rest of your life and the rest of your spouse's life.
6. Your annuity can also be set up to pay out for a guaranteed certain number of years at a minimum, so if you die a year after buying one, your heirs will still collect some money.
7. Some annuities offer you the option of having your payout increase over time by a certain percentage, such as 2% or 3% annually. This can help you keep up with inflation -- though it will likely mean smaller payments to start.
8. You may be able to buy an annuity not just with money from your savings, but potentially within a tax-advantaged retirement account such as an IRA or a 401(k).
9. Annuities aren't protected by the FDIC or a similar agency, so be sure to only buy from highly rated insurers. Better still, consider splitting your purchase across a few insurers, to play it even safer.
10. There are even annuities that can work as long-term care insurance -- paying more than the usual benefit if and when you need long-term care. (There are also hybrid life insurance policies addressing long-term care.)

If you're now interested in annuities, great! But don't rush into buying one (or more) until you've done a lot of reading up on them -- because there's much more to know, beyond the information above. And don't just buy one that someone tries to sell you without asking questions and comparing fees and benefits. Shopping around is smart, because there are many other annuities out there than the particular ones a given financial services company is offering you.

Don't be afraid to consult a financial advisor about your overall retirement plan, too, as retirement is such a critical topic. You'll want to figure out how much income you'll need and how you'll get it, while not taking on too much risk.