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Insights & Education

It’s time for a fresh look at annuities

October 29, 2024 | 5 min read

 

Today’s annuities are designed with greater flexibility, so you don’t have to give up access to your money to generate lifetime income.

Not your grandmother’s annuity

While annuities have been around for a long time, they have evolved over the years to meet the changing needs and preferences of retirees. Today’s annuities go beyond their original design where an individual would give a lump sum of money to an insurance company in exchange for a series of guaranteed annuity income payments. 

People do still purchase annuities to secure lifetime income in retirement, but some annuities now offer two ways to get it:

  • The standard way, through “annuitization,” or

  • A new, more flexible way—the Guaranteed Living Benefit1

In this article, we’ll review how Guaranteed Living Benefits provide the core annuity benefit of lifetime income without giving up access to your money. We’ll also take a closer look at annuitization. And finally, we’ll compare Guaranteed Living Benefits to annuitization so you can make a more informed choice about your lifetime income options.

 

Now more flexibility and control with a Guaranteed Living Benefit2

To help provide more flexibility, choice and control when generating lifetime income, some annuities now offer Guaranteed Living Benefits as an alternative to annuitization. These benefits offer several key advantages compared to annuitization.

With a Guaranteed Living Benefit:

  • The annuity owner can take ongoing withdrawals from their account for lifetime income.
    • As withdrawals are taken, the account’s remaining balance will decrease.
    • Even if the account value is reduced to zero due to ongoing withdrawals, lifetime income payments will continue to be paid by the insurance company for as long as the annuity owner lives.3
       
  • The annuity owner retains access to their account value.

  • The annuity contract’s death benefit remains in effect.

 

Hypothetical illustration of how a Guaranteed Living Benefit can work

Hypothetical example is not to scale and is for illustrative purposes only.

To receive the benefit of the lifetime income guarantee, withdrawals need to be taken within certain defined parameters, which are spelled out at the time annuity is purchased. For example, a Guaranteed Living Benefit may offer 5% lifetime withdrawals. That means $100,000 would provide $5,000 of annual guaranteed income for life.

 

Access if and when you need it

With a Guaranteed Living Benefit, the annuity owner still has access to their money should they need it—perhaps for an unexpected expense in retirement, such as a home or car repair. However, if withdrawals exceed the annual limit (for example, $5,000 from our earlier discussion), these withdrawals will reduce the amount that can be withdrawn in the future and depending on the size of the withdrawal, potentially eliminate the lifetime income guarantee.

Guaranteed Living Benefits are not available with all annuities. If offered, they may be automatically included in the annuity contract or they may be an optional feature that can be added at the time of purchase for an additional cost. Some Guaranteed Living Benefits can also help annuity owners automatically grow their future retirement income. Additional fees, age restrictions and other limitations may apply to Guaranteed Living Benefits.

 

A closer look at annuitization

Now that we’ve reviewed Guaranteed Living Benefits, let’s take a closer look at the other way to generate lifetime income from an annuity: Annuitization.

While it sounds complicated, annuitization is simply the process of converting an annuity’s value into a series of annuity income payments. There is no additional cost associated with annuitization and the available annuity payment options may include:

  • Life annuity option: Provides lifetime income for as long as one person is living

  • Joint and survivor life annuity option: Provides lifetime income for as long as one of two people (typically spouses) is living

  • Period certain annuity option: Provides income for a fixed period of time—for example, 10, 15 or 20 years

Once an annuity owner annuitizes, they no longer have access to their account value as the value has been exchanged for a series of guaranteed income payments. Annuitization is typically irrevocable. Once the annuity is annuitized, there’s often no reversing this process. While annuitization is less flexible than a Guaranteed Living Benefit, income rates are generally higher.

 

Comparing the two ways to get lifetime income from an annuity

 Guaranteed Living Benefit2Annuitization
Owner receives guaranteed lifetime income3
Owner retains access to their account valueNo
There is a guaranteed death benefitDepends on the annuity payment option selected4
Additional cost may applyNo

Keep in mind, not all annuities offer Guaranteed Living Benefits.

 

To learn more, take the next step and ask your financial professional about annuities.

1Annuity guarantees are backed by the claims-paying ability of the issuing insurance company.

2Please see the contract or prospectus for complete details about the annuity and Guaranteed Living Benefit you may be considering.

3Withdrawals must be taken within certain parameters to realize the benefits of a Guaranteed Living Benefit. Joint Life income options are also typically available.

4Note: Depending on the type of annuity income payment option selected by the annuity owner, a beneficiary may receive certain remaining annuity income payments guaranteed under the annuity income payment option, if applicable.

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