Annuities aren’t such a modern concept as you might think. Although many people are just now hearing about annuities, they’ve been around as far back as the Roman Empire. Citizens of Rome would make a lump sum payment into what they called an “annua” fund. They would then receive a payment each year until death. In the Middle Ages, annuities were used to raise money to pay for wars. In the U.S., the Presbyterian Church used annuities starting in 1720 to fund retirement accounts for ministers and their family. As of 1812, annuities became available to the general public. All goes to show that annuities are a proven asset, which is one of the reasons why they are so lauded today. But are they as good as their reputation?

Benefits of Fixed Annuities

Each type of annuity carries with it unique benefits. You’ll want to decide on the type of annuity you get by evaluating your needs and expectations. One of the most popular kinds of annuities are fixed annuities. These have a wide range of benefits that makes them appealing to people of all economic classes. Some—but not all—of the benefits listed here are also available with other annuity types.

Tax-deferred

Earnings on fixed annuities are tax-deferred, meaning you don’t pay taxes until you begin receiving payments. If you think you’ll be in a lower tax bracket by that time, this is an especially huge benefit.

Money is Safe From Creditors

No matter what kind of financial situation you find yourself in, your creditors can’t get to your annuity. In fact, your money is private from both creditors and lawsuits.

Your Heirs Can Benefit, Too

After your death, your fixed annuity can pay benefits to your heirs. free from the constraints of probate court. Your money will pass directly to your named beneficiary/ This cannot be contested by anyone, either.

Isn’t Included in Student Loan Applications
You aren’t required to include fixed annuity assets on your child’s student loan application, which can make the difference between qualifying and not qualifying.

Note that each state may have different rules regarding annuities, so it’s imperative to consult with your CPA regarding these benefits and benefits of other types of annuities.

Who Can Get an Annuity?

Everyone can get an annuity. There’s no accreditation needed as there is for some other large investment vehicles. You don’t need to have reserve funds in your bank account, or have a history showing that you’re a sophisticated investor. As long as you have the up front cash payment to deposit, you can set up an annuity.

Just know that once you hand over that money, you’ll be liable for surrender costs and other possible fees if you take your money out sooner than the contract terms allow. Therefore, the money you put in should be considered separate from other money and investments you have. This isn’t something you can change your mind about later without significant financial penalties.

Different Kinds of Annuities

Finally, another important thing to know is that not all annuities are the same. Annuities come in various forms, each with unique features and purposes. Here's a brief overview of the different types of annuities:

Fixed Annuities - These annuities provide a guaranteed fixed payment amount over a specified period or for the lifetime of the annuitant. The insurer guarantees both the principal and a fixed rate of interest. They are considered low risk and offer a stable, predictable income stream, making them suitable for risk-averse investors.

Variable Annuities - Unlike fixed annuities, the payments from variable annuities fluctuate based on the performance of investments chosen by the annuitant. These investments often include stocks, bonds, and money market funds. While they offer the potential for bigger returns compared to fixed annuities, they also come with higher risk due to their reliance on market performance.

Indexed Annuities - These are a type of fixed annuity, but their return is tied to a specific market index, like the S&P 500. Your returns are based on the performance of the index, although there's typically a maximum return amount, and a guarantee against loss of principal. They offer a balance between the chance for larger returns and the security of a guaranteed minimum return.

Immediate Annuities - These start paying out income almost immediately after a lump sum is invested. They are often used by retirees who need a steady income stream right away. The payout can be structured to last for a specific period or for the lifetime of the annuitant.

Deferred Annuities - With deferred annuities, the payout begins at a future date, often upon retirement. Contributions are made either as a lump sum or through a series of payments. The money invested grows tax-deferred until it is withdrawn.

Lifetime Annuities - These guarantee income for the lifetime of the annuitant, regardless of how long they live. This removes the risk of outliving one's savings. The downside is that if the annuitant dies early, the remaining value of the annuity may not be passed on to heirs, depending on the contract terms.

Fixed-Indexed Annuities - A hybrid of fixed and indexed annuities, these offer a base rate of return, plus potential additional interest based on the performance of a market index.

Joint and Survivor Annuities - Joint and survivor annuities continue to provide payments for as long as either you or your spouse is living. The payment amount may decrease after the first spouse's death, depending on the contract terms.

As you can see, there are lots of different variations on annuities, and this may not even be a complete list. Financial institutions often create proprietary or hybrid annuities that are tailored to their customers’ needs. Be sure to consult with your CPA before moving ahead with an annuity.

There are very few drawbacks to annuities. As long as you’re aware of early withdrawal penalties, this is an asset worth considering. But, as with other investments, be sure to consult with your CPA before making any moves.

by Kate Supino