Frequently Asked Questions About Annuities in Retirement

Even after learning the basics, many retirees have lingering questions about annuities. Here are answers to some of the most common concerns we hear.

Is my money safe in an annuity?

This is a very important question. The guarantees in an annuity contract are backed by the financial strength and claims-paying ability of the insurance company that issues it. This is different from a bank account, which is insured by the FDIC, a government agency. Therefore, it is crucial to choose a highly-rated, financially sound insurance company. You can check the ratings of an insurer from independent agencies like A.M. Best, Moody’s, and Standard & Poor’s.

For an extra layer of protection, every state has a nonprofit “state guaranty association” that can step in to protect policyholders up to certain limits if an insurance company fails. You can learn more about these protections on the website for your state’s insurance commissioner.

What happens to the money if I pass away?

This depends entirely on the payout option you choose when you annuitize your contract. If you choose a “Single Life” or “Life Only” option, the payments are guaranteed for your life, but they stop when you pass away, and no money goes to your heirs. This option provides the highest possible monthly payment.

However, there are many other options. A “Joint and Survivor” option will continue payments to your surviving spouse for as long as they live, although the payment amount may be reduced. A “Period Certain” option guarantees payments for a specific number of years, like 10 or 20. If you pass away during that period, your beneficiary will continue to receive the payments until the period ends. These options provide more protection for your loved ones but will result in a lower monthly payment for you.

Can I lose money in an annuity?

It depends on the type. In a fixed annuity, your principal is guaranteed by the insurance company. You cannot lose your initial investment unless the company itself fails, which is rare for highly-rated insurers. In a fixed-indexed annuity, your principal is also protected from market downturns. You won’t lose money if the index it’s tied to goes down.

However, in a variable annuity, you can absolutely lose money. Because your funds are invested in stock and bond sub-accounts, the value of your account will fall if those investments perform poorly. Many variable annuities offer optional riders that can guarantee a minimum income or a return of your principal, but these riders come at a significant cost that reduces your overall growth potential.