Annuities can provide a reliable income stream in retirement, but if you die too soon, you may not get your money’s worth. Annuities often have high fees compared to mutual funds and other investments. You can customize an annuity to fit your needs, but you’ll usually have to pay more or accept a lower monthly income.

Why do insurance companies issue annuities?

An annuity is a long-term investment that is issued by an insurance company and is designed to help protect you from the risk of outliving your income. Through annuitization, your purchase payments (what you contribute) are converted into periodic payments that can last for life.

How do insurance companies benefit from annuities?

A fixed annuity promises to pay investors a specific return on their invested principal. An insurance company will invest the money anticipating a certain return, and provides slightly less to the annuity holder. This spread between the money earned and the money paid out is profit for the insurance company.

Is it safe to invest in an annuity?

For many advisors, the possibility that insurance companies will run into financial difficulties makes recommending annuities a nonstarter. But annuities are the best way to mitigate longevity risk, which may pose a greater danger, and advisors can take steps to help protect clients from insurers’ financial problems.

Are there any cases of insolvency in annuities?

Insurance company insolvencies have been few, companies in trouble have often sold business to healthy insurers, and guaranty associations have provided an additional safety net. In my review of the historical record, I could only find a few cases where annuity owners ended up with less than their insurer promised.

Is the money you get from an annuity guaranteed?

Annuity income is not 100% guaranteed. The financial company you’ve contracted with does promise to pay you according to the terms of the contract, but that promise is only as reliable as the company that sells it. Thus, seek out the best-rated insurers and financial services companies and perhaps divide your purchase money between a few of them.

Who is most likely to sell you an annuity?

They are managed by life insurance companies, and the person most likely to sell you an annuity is not a stockbroker but an insurance agent. 3  When the annuitant reaches age 59½, some annuities begin paying out its cash value through a series of fixed payments.