• Mark Dierolf

How annuities can work for you

Updated: Sep 1

Annuities are a financial planning tool used for retirement and estate planning. Annuities can offer you:

  1. Regular payments of interest and principal;

  2. Tax-deferred growth of savings;

  3. A benefit for your heirs; or

  4. A lifetime income benefit for you.

Social Security and pension benefit payments are examples of income annuities. Lottery winning payments are too. But annuities are a specialty of life insurance companies, often issued for a 3-year or longer term.


Annuities come in different flavors.


Income annuities offer:

  1. Regular payments of over a fixed period of time;

  2. A benefit of more than you paid in; or

  3. Guaranteed income for life.

Deferred annuities offer:

  1. Growth of savings;

  2. Tax-deferral of interest; or

  3. The benefits of an income annuity.

Annuity withdrawals work differently than income payments: interest is withdrawn before principal, and there may be a tax penalty for withdrawals before age 60.


Deferred annuities are popular, but ask about the following before you buy:

  • How long is the term and does it renew?

Annuities have a surrender charge period that may renew like a bank CD, but in most cases, it ends by the 10th contract year.

  • Are there annual charges?

Annual charges are common when growth is based on market performance, and riders cost too because they offer extra benefits.

  • Is a Guaranteed Withdrawal Benefit needed?

This is the most misunderstood annuity benefit. It's often called an "income" benefit and insurers often promise a benefit rollup of 6% or more, but it's only income if you outlive your savings.


When the benefit is used, annual withdrawals are frozen at the benefit amount. When the account balance reaches zero, the insurance company pays the benefit amount to the owner for the life of the insured.


This benefit competes with an income annuity. You usually pay an annual premium for it as a rider on a deferred annuity.

  • Is a premium bonus needed?

Some insurers offer a premium bonus as an incentive for buying an annuity with a long surrender charge period. But expect the bonus to cost you in future earnings if the bonus if more than 1% of your premium.

  • Are my savings at risk of loss from a market downturn?

All savings is at risk of loss in a "variable" annuity, but not in "fixed" annuity.


Variable annuities are for savers with investment experience because your savings are at risk from a market downturn. They are sold by stock brokers, often with a Guaranteed Withdrawal Benefit in case you lose your savings.


Fixed annuities are the way to go when no worries is the goal. They offer:

  1. Safety of savings from a market downturn;

  2. The safety of the insurer's claims-paying ability; and

  3. Earnings tied to market growth or like a bank CD.

  • Finally, ask what benefits and riders are available for you.

Some annuities offer an enhanced benefits, like if you become disabled, need assisted living care, or a benefit for heirs when life insurance is no longer an option. Always ask.


Savers love annuities when they understand how they work.


Learn more about annuities by calling Mark Dierolf @ (831) 753-0507.

Services are offered for fixed-rate annuities.

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