Annuities: A Longevity Risk Solution
What makes an annuity tick? Short answer: Annuities are contracts made with an insurance company. Your annuity can be personalized to fit your exact needs.
The downside? The options can be overwhelming.
Types of Annuities
Fixed, variable, and fixed-indexed annuities are the three main types. Each comes with benefits and specific levels of risk based on your needs.
| Type | Interest | Risk | Reward |
| Fixed | Guaranteed | Low | Predicted |
| Variable | Coordinated to investments | High | Unpredictable, yield varies |
| Fixed-indexed | Preset, linked to stock market index | Medium | Capped |
Fixed Annuity
With the least risk and the most predictability, fixed annuities are contracted with a set interest rate. The only time the interest may vary is depending on terms of the contract with the insurance company. For example, per contract, sometimes the interest rate may reset after several years.
Variable Annuity
The variable annuity promotes higher yield but comes with the greatest risk. The interest rate is directly linked to an investment portfolio. Payments from the annuity are not consistent. If the investments are doing well, the payments will increase. If they are not doing well, the payments will drastically decrease.
Fixed-indexed Annuity
As middle grounds for fixed and variable annuities, this annuity comes to a compromised agreement. The contract carries lower risk and has a potential higher yield than fixed annuities. Thus, the interest rate will not sink below a present amount, but the rate is tied to a specific stock market index and could potentially rise.
Payment Arrangements
Immediate annuity, also income annuity, is when the holder begins receiving payments within a few years after the contract is purchased.
Deferred annuity is the most common in retirement, the most ideal to streamline retirement income for CPAs. These payments are started at a specific age while investment grows tax deferred.
Longevity Risk & Annuities
Since annuities guarantee lifetime income, they are a means to protect against the longevity risk your retirement will face. Payments are based on the health, age, and life expectancy of the annuitant holder. Note: The longer a person is calculated to life, the longer the payments may be.
Lifetime annuities: guarantee of an income stream for the holder’s lifetime. Often, the payments extend to beneficiaries after the holder’s passing. This covers your retirement and serves as inheritance for family.
Fixed-period annuities: guarantee of payment for a set period, also called term-certainty. These periods are typically 20-30 years. Moreover, the payments here are not as impacted by age and life expectancy of holder since they are a set period.