Reasons to Buy an Annuity

Most people buy annuities because they offer one powerful benefit that other products can't— guaranteed income in retirement. A guarantee of lifetime income provides security and comfort. Even if your other investments lose money, your annuity payments will still be there. Together with your social security income, annuities can help ensure you have income to live on in retirement.

There are several other reasons to buy an annuity: they grow tax-deferred, they can be very low risk, and they offer a powerful way to pass money to beneficiaries.

In this article, we outline the main reasons to buy annuities and explain why their unique advantages make them a fantastic component of any retirement plan.

Guaranteed Income for Life

The top reason to buy an annuity is that annuities provide guaranteed lifetime income.

An annuity is like a private pension that you fund yourself.You fund an annuity by paying a premium to a life insurance company. Some companies have flexible premium annuities that you fund with regular amounts over a period of time. Some companies have single premium annuities that you fund with a lump sum.

Later, when you retire, you can annuitize the annuity. When you annuitize you select from payout periods that can be for a short period of time or for the rest of your life.

Imagine the security this gives you. You can feel confident that there will be consistent, guaranteed income payments for the rest of your life. A lifetime income helps retirees feel confident about the future. It's difficult to really know how much retirement savings you might need. Your monthly income from annuity payments helps relieve the worry that you won’t have enough income to meet your daily needs in retirement.

Note: Annuities are the only financial product that can guarantee lifetime income. That's one of the reasons they are an indispensable tool for retirement planning.

Tax-Advantaged Retirement Income

A second important benefit of annuities is that they offer tax-deferred growth.

Tax deferral means that you don't pay taxes on any annuity earnings when you earn them. Instead, you pay taxes on earnings when you make a withdrawal or receive annuity payments. This is a big advantage because it helps boost your earnings in two important ways.

First, it results in faster growth of your annuity account value. The money that you save by not paying taxes immediately stays in your annuity account and earns additional interest. Since you have a larger principal, your earnings grow faster. Over time, that money that you didn't have to pay in taxes helps you earn significantly more than you would have if you had to pay taxes on the gains each year.

Second, most people pay taxes on their annuity income in retirement. Retirees generally have less income in retirement than they did during their working lives and therefore fall into a lower income tax bracket. By paying a lower income tax rate on annuity distributions, annuity owners end up paying less tax overall.

For both of those reasons, annuities are a tax-advantaged way to save and grow your money. Some other retirement accounts also offer tax advantages (like IRAs), but often have the disadvantage of contribution limits. Annuity products give you these powerful tax advantages without limits on contributions.

Note: We must emphasize here that tax-deferral is not the same as tax-free. You eventually have to pay taxes on your annuity earnings. The difference is timing. With other financial products like stocks, mutual funds, or CDs, you pay capital gains taxes in the year you earn those gains. With annuities, you’ll owe ordinary income taxes in the year you receive your income. Often, that means you can defer taxes for many years into the future.

See our guide for more details on annuity taxation. Remember: annuity taxes also depend on whether you buy qualified vs. non-qualified annuities.

Steady Growth

A third reason to buy an annuity is guaranteed growth. This is very unique among investment products. When you invest in the stock market, you could earn very high returns. But you could also lose money too. Annuities—certain kinds of annuities, mind you—guarantee growth. This makes fixed annuity contracts one of the safest, lowest-risk investments around.

Which annuities offer guaranteed growth? Fixed annuities.

Fixed annuities are annuities that have a guaranteed minimum rate interest rate. In this type of annuity contract, the buyer receives a minimum, fixed rate of interest on the contributions they make to the account. This minimum rate, generally greater than 0%, is guaranteed in the contract. The actual rate offered to you is almost always greater than the minimum guaranteed rate.

For example, at the time of this writing, Canvas Annuity offers fixed annuity rates over 3% on the 5- and 7-year future fund annuity. This means that, over the guaranteed term of the annuity contract you choose, you know your money will grow at that specified rate.

When the term is over, you may receive a new interest rate but it will never be less than the fixed, guaranteed minimum rate specified on your contract. That means, as long as you leave your money in the annuity, your money is guaranteed to grow.

There are some other types of annuities that adjust the interest rate based on the inflation rate. This helps ensure that the interest rate always stays above inflation.

See our guide on inflation-protected annuities for details on how you can ensure your immediate annuity income exceeds inflation.

Note: Variable annuities and fixed-indexed annuities do not offer the same kind of guaranteed, steady growth. The interest rates in these types of annuities, and the corresponding size of the annuity payouts, introduce market risk and depend on the performance of the stock markets. These annuity options offer potentially larger earnings, but also the chance that you could fail to earn money—or even lose money, in the case of variable annuities. It's a good idea to consult a financial planner to understand the risk associated with these two types of annuities before purchasing one of them.

Possible Additional Rider Benefits

Annuitants benefit from annuities, but so can their families and loved ones. Here are some additional reasons to buy an annuity.

Death Benefits

Annuity death benefits allow your spouse, family, or other beneficiaries to inherit the remainder of your annuity account value in the event of your death. Not all annuity contracts have death benefits, but most do—either built into the contract or available as an optional add-on. In the case that an annuity does not have death benefits, the annuity payments stop after the annuitant or owner's death. (Note that all Canvas Annuity's products come with death benefits included.)

When you buy an annuity that has death benefits, you select one or more individuals to be your beneficiary. The beneficiary will inherit any remaining annuity payments (if you have annuitized your annuity), or the annuity account balance, after your death.

Death benefits help you feel confident knowing that any money you put into your annuity will go back to your family or other important people in your life. It's one of the reasons that annuities are such powerful legacy-planning tools.

Long-Term Care Insurance

Part of effective retirement planning is also planning for your health—and it's potential decline. We all hope to have a long retirement where we can live independently without assistance, but the reality is that many of us will need long-term care at some point in our lives. Some of the costs of that care may not be covered by traditional health insurance. That's why it's prudent to plan for the expenses that long-term care can require.

Annuities can help here, too.

Normally, there are penalties that occur when you make early withdrawals from an annuity. Depending on the circumstances, these can include tax penalties from the IRS and surrender charges from annuity companies. However, many annuities (including those offered by Canvas Annuity) allow you to withdraw a specified percentage of your annuity balance each year without penalty. That means you know you'll be able to access some of the account value of your annuity to pay for health care or any other expenses if you need to.

Another option is to buy long-term care annuities—annuity products that have provisions for long-term care insurance added onto them. These annuities are often considered hybrid annuities because they blend features of both annuities and health insurance products. When you buy a long-term care annuity, your contributions fund an annuity that pays you a regular income in retirement (just like a regular annuity).

But, if you ever come to require long-term care, the insurance company provides payments to help with those expenses. This is a massive benefit: annuities offer not just a way to help you feel financially secure in retirement, but they can also help you pay for unexpected costs associated with poor health in retirement.

Options for Beneficiaries

A final reason to buy annuities is that they give you many options for helping you take care of your spouse (or other beneficiaries) even after you pass away.

One common option is the joint payout annuity (also called survivor annuity). When you buy an annuity that allows for joint annuitization payouts, you add your spouse (or another person) to be a joint annuitant. You both receive annuity payments as long as one of you survives. This means that your spouse will continue to receive payments, even if you pass away before they do.

Again, the big benefit here is financial certainty. You'll feel comfortable knowing that both you and your spouse will continue to have an income even in the event of one of your deaths.

How to Know if an Annuity is Right for You

The main reason to buy an annuity is this—peace of mind.

Annuities can provide financial certainty. Planning your personal finances for retirement is never easy, but annuities do make it a little easier. Because they offer guaranteed income, they give you the comfort of knowing that you will continue to receive monthly payments (if you choose them) after you stop working.

Each of the annuity features listed above contributes to that feeling of security and helps you feel confident that you won't run out of money after you stop working.

Want to get started with annuities? Canvas can help. You can buy an annuity online in minutes or with the help of a licensed call center agent. Get started here.