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While many people buy life insurance to ensure against dying too soon, annuities are a tax-qualified means to ensure against living too long. With their many features and various costs, annuities may seem confusing at first. They do, however, have a place in many wealth management plans and can help individuals provide for their retirement years. So taking a few minutes to understand annuities is time well spent.
Annuities are designed to offer investors tax-deferred growth and a lifetime stream of income. There are two phases involved in an annuity:
Accumulation period — when you’re making annuity contributions
Annuitization period — when you’re receiving annuity payments from your annuity account
The main features of annuities to keep in mind are:
- Tax-deferred accumulation of earnings(1)
- Various pay-out options upon annuitization
- Fixed or variable accumulation and payout rates
- Unlimited contributions
- Professional money management
- Variety of protection features
The main features of annuities to keep in mind are:
Fixed or Variable
A fixed annuity provides a guaranteed return(1), often in the form of a monthly payment. Investors do not choose among investment subaccounts. Some fixed annuities offer interest rate guarantees that may go up and down depending on market performance but will never fall below the rate specified in the annuity contract.(1)
With variable annuities, investors allocate their money within subaccounts that suit their investment styles and objectives, with ability to make tax-free transfers among accounts. Phoenix, for instance, offers more than 40 subaccounts managed by nationally and internationally known professional money managers.
There is risk involved in a variable annuity since the subaccounts are closely tied to market fluctuations. While some subaccounts offer guaranteed rates, most do not offer any guarantees.
Single Premium or Flexible Premium
Investors can make a single, lump-sum premium payment (subject to individual products’ provisions), or set up a schedule to allow contributions in varying amounts. Unscheduled payments are accepted as well.
Immediate or Deferred
These terms refer to the annuity’s payout phase. In an immediate annuity, investors put in a lump sum and begin receiving annuity payments right away. With a deferred annuity, payouts begin after the accumulation period during which contributions are being made.
Benefits of Annuities
Unlike other retirement plans, such as IRAs, 401(k), or 403(b) plans, there is no limitation on the amount you may contribute to a nonqualified annuity. You can have these types of investments inside of an annuity and, depending on the situation, it may make sense to do so. However, variable annuities shouldn’t be purchased in qualified plans just because of the tax-deferral feature, but rather when other benefits, such as lifetime income payments, protection through death benefits and guaranteed fees support the recommendation. Additionally, there are no required distributions at age 70 1/2. Annuities offer you the option of receiving a guaranteed income(1) for your lifetime. In a fixed annuity payout, your monthly payment remains the same. In a variable annuity, your payment will go up or down depending on the performance of the underlying investment subaccounts.
Annuities also offer a death benefit so your beneficiaries will receive the balance in your account should you die before your contract matures. Phoenix offers you the option to buy a “step up” death benefit. This protects investment gains for your beneficiary because each year, on its anniversary, your contract value is noted. Then, upon death, your beneficiaries receive the greater of premiums that you paid in, your current contract value, or the highest value noted on any anniversary.
In a variable annuity, you may make tax-free transfers between your investment subaccounts, allowing you to rebalance your assets to maintain a diversified portfolio.
Types of Settlement Options
If you decide to begin taking money out of your annuity, you can annuitize by receiving regular payments or take unscheduled or systematic withdrawals. There are several payout choices. You should work with your advisor to choose the option that best suits your retirement lifestyle. Phoenix, for instance, offers the following types of settlement options:
Straight life: Guarantees income for life.(1)
Life with period certain: Guarantees income (for you as the annuitant or your designated beneficiaries, in the event of your death) for a certain period of time, generally from five to 30 years, or your lifetime, whichever is greater. Phoenix offers 10-, 15- or 20-year settlement options.(1)
Joint and survivor income: Provides an income payable to you over your lifetime and your joint annuitant’s lifetime, whichever is greater.
Joint survivor life with period certain: This option combines some of the provisions listed above. It offers annuity payments for the greater of your lifetime, your joint annuitant’s lifetime, or a certain period of time (for example, 10, 15 or 20 years). Phoenix offers joint survivor life with 10 years certain.
Annuity for a specified period of time: Choose to receive payments for a set number of years, from five to 30. Phoenix allows you to change your specified period at your contract anniversary.
Unit refund life annuity: Similar to a straight life annuity payout, this income-for-life option pays your beneficiary a lump sum upon your death.
Some annuities allow you to take systematic withdrawals. This distribution option is subject to taxes and penalties* but isn’t subject to surrender fees.
Tax Treatment of Annuities
Any growth in your annuity accumulates on a tax-deferred basis. At payout, earnings are treated as ordinary income, not as capital gains.
A qualified annuity is purchased with before-tax dollars; a non-qualified annuity is purchased with after-tax dollars. Exceptions to this include Roth IRAs and non-deductible IRAs. Qualified annuities can be used in IRAs, 403(b) and 401(k) retirement plans, but shouldn’t be used solely for the annuities’ tax-deferral features but for the other benefits of annuities: lifetime income payments, protection through death benefits and guaranteed fees.
Death Proceeds
Because an annuity is an insurance contract, it pays a death benefit to your beneficiaries. It is subject to income tax for your beneficiary, and may be included in your estate for estate tax purposes.
Once in the payout phase, additional contributions cannot be made into your annuity contract and there is no death benefit per se – payments would then be subject to the provisions of the settlement option you chose when you began receiving payouts.
(1) Guaranteed returns are based on the claims-paying rating of your insurer. Fixed annuities are not insured or guaranteed by the FDIC.
*Early withdrawals may be subject to surrender charges. Withdrawals of income will be subject to tax, and, if taken prior to age 59-1/2, will also be subject to a 10% IRS penalty except as provided for under IRC Sec. 72. In addition, an interest adjustment, either positive or negative, may be applied to amounts taken as withdrawals or a full surrender prior to the end of an interest rate guarantee period, except if the withdrawal is made within the 30-day window period, is part of the annual 10% free withdrawal, or is for the terminal illness or nursing home waivers.
Source: Phoenix Wealth Management

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