Best Annuity Companies

As you approach retirement, you might wonder how you will cover all your expenses. Social Security alone may not be enough, with an average monthly benefit of $1,770.71. If your monthly benefit is near the average, you'll likely need another source of income in retirement. This is where annuities can help.

An annuity might be worth considering if you need the income security they can provide.

“Generally, you're looking for one of two situations,” said Tim Kirch, a certified financial planner at Nashville Financial Planning. “Someone who either needs [or] will need to help protect income for longevity or someone who is really concerned about market volatility and wants to help protect their assets.” In these cases, it might be worth looking into annuity options.

You can purchase an annuity with a lump-sum payment or pay a monthly premium. In return, you receive a monthly payment you can use to cover expenses. Annuities often come with a death benefit paid to your beneficiary either in one payment or multiple payments over time.

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Annuities can be immediate, starting payments right away or deferred, with payments beginning on a future date. In addition, annuities can be fixed or variable. Fixed annuities pay the same amount every month, while variable annuities may pay a different amount depending on the performance of a market index.

Fixed annuity

A fixed annuity sets a guaranteed payout for the rest of the beneficiary's life. Fixed annuities can provide predictability and a steady income during retirement.

Variable annuity

A variable annuity's payout stream depends on the performance of an underlying investment. Variable annuities provide growth potential.

Fixed-indexed annuity

A combination of a fixed and a variable annuity is known as a fixed-indexed annuity. The annuitant receives a guaranteed minimum payout, while the rest of the payment varies depending on the underlying investment's performance.

Fixed-indexed annuities come with a hidden cost: they limit the profits you can make. This means if the index they are tied to makes big gains, you'll only benefit up to a certain point because of a cap on your earnings. However, you will also be protected if the index’s value drops.

Immediate annuity

Immediate annuities make payments shortly after the investment is made. These can be fixed or variable.

Deferred annuity

Any money earned by investing in a deferred annuity accumulates until the payout is set to begin. Deferred annuities can be fixed or variable, and you can convert them into immediate annuities once you are ready to receive your payments.

Annuity payout options

Annuities also have various payout options. Examples of payout options include:

• Lump sum: The annuity pays its accumulated value in a single payment. This gives you complete control over the funds, but there is no protection against outliving your assets.
• Periodic payments: You receive periodic payments over time, such as 10 or 20 years. It provides steady income, but payments usually end after the predetermined period.
• Life annuity: This is when you receive guaranteed payments for life. This option gives you protection against outliving your savings, but you might receive less if you have a shorter lifespan.
• Period certain annuity: You receive payments for a given period, such as 10 or 20 years. If you die during that time, payments continue to a beneficiary. However, payments end after the set period, regardless of your lifespan.
• Joint and survivor annuity: Provides payments for life for you and your spouse. However, payments are typically lower after one partner dies. This provides income security for you and your spouse, but the benefit amount is typically lower than a single-life annuity.

Annuities can have many payout options, each of which may work better in different situations. The best choice for you depends on your preferences and goals.

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There is much to consider when comparing annuity companies. Many companies offer annuities, with each offering a variety of annuity types. No company is perfect, either, so you’ll need to weigh the right factors to make the best choice.

Financial strength

While financial strength is always important when doing business with a company, it’s essential when looking for life insurance policies. You wouldn’t want your annuity company going out of business before it pays you.

You can gauge a company’s financial strength by checking the scores in the table above. These include the company’s rating from A.M. Best and S&P Global and its COMDEX Score. All these ratings measure a company’s financial strength; look for ratings of A or above.

Products and features

Check that the annuity company you are considering has the features you want before moving forward. This includes having the right annuity types, income riders and reasonable fees.

As detailed earlier, many types of annuities are available, including fixed, fixed-indexed and variable. Your annuity company of choice should have the annuity type you prefer. Also, compare income riders, which are optional annuity features. For instance, one income rider might include protection against market downturns.

Don’t forget to check each annuity company’s fees. There might be various types of fees, such as surrender charges, administrative fees, rider fees and mortality and expense risk (M&E) charges.

Flexibility

The best annuity companies should provide flexibility through multiple withdrawal options. In addition, penalties for withdrawals should not be excessive. Compare potential fees from various providers to ensure you aren’t overpaying.

In addition, your annuity should be customizable. This should allow you to customize the annuity to meet your preferences and goals.

Customer service reputation

The best annuity companies generally have the reputation to prove it. Check sources like the Better Business Bureau, state insurance websites, and user forums to get a sense of the company’s reputation. In addition, research the company’s ability to handle customer issues and their average response time.

Tips for comparing annuity companies

When comparing annuity companies, carefully consider what each company offers and whether their products are the right fit for you. Get quotes from at least three insurers using comparison tools to cross-check products, features and fees. Be leery of high-pressure sales tactics and limited-time offers, as these can push you toward products that are not necessarily the best choice.

Annuities can have various charges and fees. Before purchasing an annuity, you should know the fees you may need to pay. Common fees and charges include:

• Surrender charges: These are often one of the largest fees you pay on an annuity. If you withdraw money before the end of the surrender period (typically six to eight years), you may pay a percentage of the account value as a penalty. These percentages are usually declining, with the highest percentage in the first year.
• Administrative fees: These cover the administrative costs of maintaining your annuity. For instance, there might be costs associated with paperwork and record-keeping. It could be a flat fee or a percentage of your account.
• M&E Fees: Compensates the insurance company for the risk of providing guarantees like death benefits and lifetime income options.
• Rider fees: Additional fees may apply if you choose optional benefits, such as guaranteed withdrawal benefits or enhanced income options.

“You really want to know what the all in fees are for a specific product as there can be multiple layers, and people should also be aware of what it looks like if they ever want to change,” Kirch said. You may be unable to avoid annuity fees completely, but keeping them to a minimum is possible with the right approach.

For instance, getting quotes from multiple insurers will allow you to find the best deals available. You should also understand how the annuity company charges fees, such as a flat rate or a percentage. Prioritize lower-cost options, such as annuities with shorter surrender periods, to minimize fees.

Annuities can have important tax implications, and you should use them in the most tax-efficient way possible for the maximum benefit. The first thing to know is that annuities provide tax-deferred growth, including earnings. This means you won’t pay taxes on earnings, dividends or capital gains until you withdraw your money, making them a potentially powerful savings vehicle.

Of course, you must pay taxes eventually, and that usually comes due on the payout. However, how taxes on an annuity work may vary depending on whether it is qualified or non-qualified. Only gains are taxable as ordinary income for non-qualified annuities, while the initial investment is tax-free. Conversely, any withdrawals are fully taxable as ordinary income for qualified annuities.

You will need to use the right strategies to make your annuity as tax-efficient as possible. First, if you are in a high tax bracket now, annuitizing part of your wealth can create a steady stream of income later in life. Depending on your payout option, you might pay a lower tax rate on the income you receive from the annuity.

Another option is to spread out withdrawals. For instance, you can spread out withdrawals from qualified and non-qualified annuities to gain better control over your taxes. A non-qualified annuity can also be an alternative to a Roth IRA if your income exceeds the limit for Roth IRA contributions. This is because both accounts can offer tax-deferred growth and tax-free income.