About Retirement Annuity Rates

An annuity is an insurance contract that pays out a regular income after the policy reaches maturity. Many retirees purchase annuity plans in order to provide greater structure to their finances, particularly as lifetime annuities assure the purchaser that they will never be without a source of income. Annuity plans come in either fixed or variable rates of appreciation.

Types

Fixed rate annuity plans are invested into conservative vehicles such as bond funds by the insurance company. There's no need to spend any time managing the investment after paying the premium--the insurance company handles that for you. The advertised rate of appreciation is how much that you get when the plan starts to pay out. Variable rate annuities, on the other hand, pay out a different insurance rate depending on how the underlying investments perform, but most insurance companies offer a fixed minimum rate of return, generally between 2 to 3 percent.

Function

Retirees that are looking to make greater potential gains from their annuity plan should go with a variable rate plan, but it they are also running the risk of getting relatively lower returns than they might from a fixed rate plan. Annuities should primarily be purchased for security purposes--the additional fees tacked on to them can make them perform at a lower rate in absolute terms to most mutual and bond funds invested in directly. The other primary advantage is that the income used to purchase an annuity is tax-deferred until the contract starts actually paying out.

Features

Most insurance companies offer annuity contracts that finish paying out over varying amounts of time. In most cases, the annuities that pay off over a shorter period of time--5, 10 or 15 years--end up paying higher returns than the plans that last for a lifetime. Purchasing a lifetime annuity is essentially betting that you will live significantly longer than the statistical average. In most cases, if you die before the annuity finishes paying out, then the additional funds in the premium are lost. Be sure to ask if your annuity plan offers a "death benefit" before purchasing one.

Effects

Different insurance companies offer different rates. How good the returns are depends on a number of factors, including how low the insurance company's management overhead is, how their investments play out, how many customers they have and the health of the business as a whole. It's a good idea to deal with reputable and established insurance companies when looking for an annuity. If an insurance company enters bankruptcy, they do not have to pay out for established annuity contracts.

Considerations

If you have an annuity contract and later decide that the plan isn't working well for you, you do have alternatives. Some companies purchase annuity contracts from people and pay out in cash. This is a great alternative to withdrawing money early from an annuity plan, which almost always incurs significant penalty fees, particularly early on in the contract. Other companies allow you to roll an annuity contract into a life insurance premium, which may transfer more money to your heirs than would be possible otherwise.

Resources

• AnnuityMD: Death Benefits
• Annuity Advantage: Annuity Rate Comparisons
• Total Return Annuities: Annuity Rates