An annuity is an insurance product that pays out income, and can be used as part of a retirement strategy. Annuities are a popular choice for investors who want to receive a steady income stream in retirement. Annuities may be funded either gradually through multiple payments made over time, or via a lump-sum, one-time payment.

Annuity Products are similar to Life Insurance products in that they are contractual financial products sold by insurance companies that are designed to accept and grow funds from an individual and then pay out payments to the individual at a later point in time. Annuity Products and Life insurance are also taxed and regulated in much the same manner.

In many ways, however, an Annuity is the opposite of Life Insurance because an Annuity is usually used to pay you while you are still alive, while Life Insurance usually pays after you have died. In other words, while Life insurance is bought to deal with mortality risk – that is, the risk of dying prematurely; Annuities were designed to be a reliable means of securing a steady cash flow for an individual during their retirement years and to alleviate fears of longevity risk, or outliving one's assets

Many consider Annuity Products appropriate financial products for individuals seeking stable, guaranteed retirement income. Because the lump sum put into the annuity is illiquid and subject to withdrawal penalties , it is not recommended for those with current liquidity needs. The purchaser must understand that he or she is trading a liquid lump sum for a guaranteed series of future cash flows.

Annuities can also be purchased by people of any age who want to turn a substantial lump sum into a steady future cash flow. Accident victims who have received large lawsuit cash settlements or lottery winners who take lump sum payments often spend all of that money in a relatively short period of time. For these individuals, an Annuity Product could be an alternative that secures a steady cash flow for the future.


The biggest advantages annuities offer is that they allow you to invest a larger amount of cash and defer paying taxes.Unlike other tax-deferred retirement accounts such as 401(k)s and IRAs , there is no annual contribution limit for an annuity. That allows you to put away more money for retirement, and is particularly useful for those that are closest to retirement age and need to catch up.

All the money you invest in an Annuity Product compounds year after year on a tax deferred basis until the money is withdrawn. There is no tax liability until the money is actually withdrawn from the annuity. That ability to keep every dollar invested working for you can be a big advantage over taxable investments.

When you cash out, you can choose to take a lump-sum payment from your annuity, but many retirees prefer to set up guaranteed payments for a specific length of time or the rest of their lives, providing a steady stream of income.

An Annuity Product can serve as a complement to other retirement income sources, such as Social Security and pension plans.


Money that you invest in an annuity grows tax-deferred. When you eventually receive withdrawals, the amount you contributed to the annuity is not taxed, but your earnings are taxed at your regular income tax rate.


Your annuity investments depend upon which type of annuity you have.

There are 3 different types of annuity investment options.

  1. fixed-rate annuity
  2. equity indexed annuity
  3. variable annuity.

If you choose a fixed-rate annuity, you are not responsible for choosing the investments. The insurance company places your annuity premiums into its general account and chooses the investments for you. The insurance company agrees to pay you a guaranteed pre-determined fixed rate of return. This is the most conservative of the annuity investment options, as the annuitant knows exactly what payout they will receive.

An equity indexed annuity offers a middle ground between the fixed-rate annuity and the variable annuity. An equity indexed annuity ties the growth of its cash value account to an economic index, such as the Dow Jones stock market or the Moody Bond Fund. This annuity product will pay “at least a low guaranteed minimum interest rate”, but provides for upside growth of the cash value account. If the index does poorly, there is the guaranteed low interest rate to fall back on; however, if the index does well, the cash value account will grow at a rate higher than it would have with a fixed-rate annuity.

When you opt for a variable annuity, you decide how to invest your money in the sub-accounts (essentially mutual funds) offered within the annuity. The value of your account depends on the performance of the funds you choose. While a variable annuity has the benefit of tax-deferred growthand market upside, there is no guarantee of a specific rate of return or the return of principal invested. The owner of a variable annuity assumes all the investment risk. Funds in a variable annuity are held for the owner in a separate individual stock market account, so there is no way to predict the future value of a variable annuity. Due to the inherent risk and costs associated with variable annuities, Advanta has elected not to sell these products.


When you invest in an annuity, you not only decide how you will contribute to the annuity but also how you want your eventual payouts to be calculated and distributed. Generally, the tax deferred growth becomes taxable income when it leaves the annuity. Also, if the Annuitant has not yet reached the milestone of 59 ½ years of age, the IRS will impose a 10% tax penalty for the premature removal of annuity funds. Annuity payout options include:

Income for Guaranteed Period (also called period certain annuity). Annuitant is guaranteed a specific payment amount for a set period of time (say, five, ten, or 30 years). If annuitant diesbefore the end of the period,the beneficiary will receive the remainder of the payments for the guaranteed period.

Straight Life Annuity This annuity provides lifetime payments until the annuitant dies, at which time the insurance company owes no residual to the Annuitant’s estate. This annuity payout option encompasses considerable risk for both the annuitant and the insurance company. If the annuitant dies one month after payment begin, the insurance company makes no more payments and retains the balance of the fund. Conversely, if the annuitant lives to 120 years of age, the insurance company must pay until the annuitant dies. Always assume that an annuity is a straight life annuity unless otherwise specified. The amount of the payout is determined by how much you invest and your life expectancy.

Life Annuity with a Guaranteed Period Certain A combination of a life annuity and a period certain annuity. The annuitant receives a guaranteed payout for life that includes a period certain phase. If the annuitant dies during the period certain phase of the account, the beneficiary will continue to receive the payment for the remainder of the guaranteed period certain. For example, life with a 10 year period certain is a common arrangement. If the annuitant dies five years after payments begin, the payments continue to the beneficiary for five more years.

Life Annuity with Amount Certain This annuity payout option pays income for life but includes a guarantee that it will always pay at least a certain amount. The annuitant will continue to receive payments as long as they are alive; however, the amount certain ensures that at least a specific minimum dollar amount will be returned to the annuitant or beneficiary.

Joint and Survivor Annuity Your beneficiary will continue to receive payouts for the rest of their life after the annuitant dies. This is a popular option for married couples.

Lump Sum Annuity The funds in an annuity may be paid out as one lump sum; however, this payout option generally is contrary to some of the primary reasons for entering into an annuity.


You may use your 401(k) or IRA money to purchase an annuity. This can make sense and is usually done if someone is looking for more guaranteed income during their retirement years. They might purchase an annuity that will pay income for life rather than subject their retirement savings to investment risks.


You have the option of naming a beneficiary on your annuity, and with certain types of payout options that beneficially could receive the money in your annuity when you die. Although, with certain other payout options, the insurance company is only obligated to make payments during your lifetime, and the payments stop when you die. It is important to know your elected annuity payout option.


Commissions For starters, most annuities are sold by insurance brokers or other sales people who collect a commission that can be significant - as much as 10% in some cases.

Surrender Charges You're also likely to face a prohibitive surrender charge for pulling money out of an annuity within the first several years after you buy it. The surrender charge typically runs about 7% of your account value if you leave after one year, and the fee generally declines by one percentage point a year until it gets to zero after year seven or eight. Note that some annuities come with even heftier surrender charges - up to 20% in the first year.

High Annual Fees If you invest in a variable annuity you'll also encounter high annual expenses. You will have an annual insurance charge that can run 1.25% or more; annual investment management fees, which range anywhere from 0.5% to more than 2%; and fees for various insurance riders, which can add another 0.6% or more.Add them up, and you could be paying 2% to 3% a year, if not more. That could take a huge bite out of your retirement nest egg, and in some cases even cancel out some of the benefits of an annuity.

Early Distributions As with a 401(k) or IRA, early distributions from an annuity are subject to penalties. Withdrawals made prior age 59 ½ are generally subject to a 10% early withdrawal penalty.


Annuity exchanges are known as 1035 swaps, after the section of the IRS code that regulates them.A salesperson may tell you a 1035 swap is a great deal, because it allows you to get the features of a new annuity without incurring any taxes. However, by moving into a new annuity, you will start a new surrender period. Always be especially cautious before you exchange your existing annuity for a new annuity.


Fixed annuities are essentially CD-like investments issued by insurance companies. Like CDs, they pay guaranteed rates of interest, in many cases higher than bank CDs.

The convenience and predictability of a set payout makes a fixed annuity a popular option for retirees who want a known income stream to supplement their other retirement income.

Think you could benefit from adding a Fixed Annuity Product to your investment portfolio? Apply Today.


An equity-indexed annuity has some of the benefits of both a fixed annuity and avariable annuity. The marketing pitch usually goes something like this: Equity-indexed annuities give you the best of both worlds.

Guaranteed Return As with a fixed annuity, you get the low-risk appeal of a guaranteed minimum return.

Market Upside Return But, as with an equity indexed annuity, you also have a shot at higher gains if the stock market rises, since an equity indexed annuity's return is also tied to the performance of a benchmark index, such as the Standard & Poor's 500.

Think you could benefit from adding an Equity Indexed Annuity Product to your investment portfolio? Apply Today.

For more information or a free annuity quote, Click here.