A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Car Insurance Agent

UPDATED: Jan 12, 2017

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Don't miss these facts...

  • Life insurance annuities are designed as income insurance when you retire.
  • You can choose from fixed, variable and indexed annuities, but all carry a degree of risk.
  • Understand there are administrative, extra services, mortality rate and underlying fund fees associated with an annuity.
  • All money held in the annuity builds tax-free until withdrawal.


The stir and constant chatter about the depletion of the Social Security fund has many people worried about how to live a quality life after retirement. What are the best ways to start saving and growing a retirement fund?

A life insurance annuity might be the answer if you carefully consider what they are about, how they work and the best way to incorporate them into your investment portfolio.

Learn more about annuity and investments below and make sure to use our free comparison tool above to get a free life insurance quote above!

Annuity As Income Insurance

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You might think that a life insurance annuity works the same as a whole life policy, but they provide very different results.

A whole life policy will build cash value over time and you can borrow against the funds, but in the end, the death benefit will go to a surviving beneficiary.

An annuity builds cash over time and you can draw money from it, but it is at high costs in penalties to do so. At retirement age, they can pay a steady dependable monthly income.

At an agreed time the annuity will begin to pay you, much like the salary from a job. It can be as one lump sum or monthly. It is insurance that you have the income you need to get by in retirement years.

Fear of outliving retirement savings is common and this is one way to add an extra security blanket to your portfolio.

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Varieties of Annuities

There are three basic types of annuities available. Each type have their own level of risk and return. You should carefully weigh out your retirement planning decisions before putting money into an annuity.

There are annuities that offer a set return that makes future earnings more predictable, whereas others that involve higher risk and bigger returns if funds are invested well.

It is wise to do your homework and make sure you are comfortable with your choice in who handles your money.

Fixed Annuity

This type of annuity is set at a specific amount to be deposited and the payout is given at a set rate. It is considered the safest of all annuities. It is figured using the minimal rate of interest.

Variable Annuity

This type of annuity allows you leverage to take a portion of the money and invest it in stocks and other diverse areas, although it normally heads towards mutual fund accounts. There is obviously a lot more risk involved, but the payoff can be worthwhile.

Indexed Annuities

These annuities provide a return that is indexed with the stock market, such as the S&P’s 500. It is a careful mix of stock market and insurance product. It can be risky when the market is volatile.

Be Prepared for the Expense

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There can be a lot of fees associated with the initiation and maintenance of an annuity. This is not necessarily a negative, but make sure that all fees are outlined to you before you sign a check and get started.

Some of the fees can be:

  • Administration FeesThese are the basic fees charged to handle your account.
  • Mortality Rate – This is a percentage of your account value per year charged to the insurance company assuming the risk.
  • Extra ServicesThe addition of items like long-term care and guaranteed income will all come with extra charges.
  • Underlying FundsWhen the annuity is layered underneath with mutual fund investment there are charges added.

Keep the Annuity Long-Term

A life insurance annuity is not an investment that is good for any type of short-range financial goal. This is a product that is designed to pay off for future income generation, whether it be you, a surviving spouse or child. There are

There are heavy penalties assessed by the IRS for pulling money out before the age of 59 and 1/2 years.

You will lose 10 percent automatically to the IRS and income tax on the percentage of money made.

Add this with the actual fees assessed for having the annuity and you can stand at a substantial financial loss. Be very clear when opening an annuity that you want this for the long haul.

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Tax Shelter Benefits

An annuity is a safe place to put extra dollars if you want them to grow tax-free. You will not be assessed any taxes until they are pulled out.

At that time you will pay a tax on the funds as well as any accrued interest or capital gains. This is a decent option if you do not have access to starting a 401K with an employer.

What Happens With the Annuity Once You Die?

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The type of annuity you initially set up will determine how it all plays out after you die. Some are set up to offer a set lifetime payment until you die and then stop. Others are designed to offer you the ability to designate a beneficiary.

This can be a spouse or a child. They will then either receive a one-time lump sum or continue the regular payments to the individual you specify. Make sure you understand everything before signing any paperwork.

You do not want to find out later that there is no ability to pass the benefits on to a loved one.

If you are looking for an additional tax-free avenue to place retirement investment funds, annuities might be the answer. Contact a financial investment specialist and see what types of products are available so that you can make a choice that will fit your individual needs.

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