Annuities

Annuities can help you before and after you retire, providing tax-deferred growth during your saving years and income during retirement.

What is an annuity?

Let's start with the basics. An annuity is an insurance contract issued by an insurance company.

An annuity contract has two phases: an accumulation phase and a distribution phase. During the accumulation phase, the contract owner makes a payment or payments into the contract in exchange for a fixed or a variable rate of return that is not subject to income taxes until withdrawal, permitting the tax-deferred growth of the investment. During the distribution phase, the accumulated value of the annuity contract can be converted into a guaranteed income stream that can last for life or for a set time frame.

Types of annuities

There are three types of annuities:

  • Fixed annuities
  • Variable annuities
  • Income annuities

The two most popular types are fixed annuities and variable annuities. Fixed annuities have a guaranteed interest rate, and variable annuities provide a return based on the performance of the underlying investments (subaccounts).

With income annuities (sometimes referred to as immediate annuities or deferred income annuities, depending on when income payments begin), the full premium payment is made upfront, and income payments can begin immediately or within the first two years. Income payments can last for a lifetime or for a specific period.

Fixed annuities

Fixed annuities are designed to help you reach your long-term goals by providing a guaranteed interest rate for a set period of time. They may be a good addition to a retirement strategy, but it's important to understand how they work.

When you invest in a fixed annuity, you pay a lump sum to an insurance company. They then guarantee a stated rate of interest over a specific period of time. The interest accumulates on a tax-deferred basis, meaning you do not pay tax on the interest until you withdraw it or take it as income.

There are several key features to consider with a fixed annuity.

Tax-deferred accumulation

Generally, fixed annuities are purchased with a single payment. The account value grows tax-deferred at the guaranteed rate. When you decide to take the earnings, they are taxed as ordinary income.

Choice of guarantee periods

Your money is invested for a specific period of time, generally between two and 10 years, which you select based on your investment time horizon.

Guarantee of interest and principal

The value of your fixed annuity increases when interest is added to your contract.

Flexible income options

You can take income from a fixed annuity in a number of ways:

  • All deferred annuities can be converted to a lifetime stream of income.
  • You may also have the option to take systematic withdrawals, the amount of which can be adjusted at any time.
  • Some fixed annuities enable the policyholder to elect an optional living benefit. Such benefits can provide certain guarantees for contract withdrawals for life. These benefits may require additional fees, charges or expenses, and may be subject to eligibility limitations.

Avoiding probate

Fixed-annuity proceeds paid to the beneficiary upon death are excluded from estate probate. However, any tax-deferred earnings in the contract will be subject to ordinary income tax, and estate taxes would apply to the total value of the contract, if applicable. The payout at death is generally the accumulated value without any imposed charges or market value adjustment.

Fees & expenses

Most fees and expenses of a fixed annuity are factored into the stated annual percentage rate the client is quoted. The rate quoted is the rate paid. Fixed-annuity fees and expenses generally cover the insurance company’s administrative expenses, the cost of offering the annuitization guarantee, and profits to the insurance company and agent. Some fixed annuities may assess an annual contract fee, typically around $30.

Important considerations

  • Withdrawals prior to the end of a guarantee period may have tax consequences and surrender charges.
  • Renewal rates and fixed-income payments may not keep pace with inflation.
  • The guarantees provided by any type of insurance contract are based on the claims-paying ability of the insurance company.

Variable annuities

Variable annuities are insurance contracts designed to help you reach your long-term financial goals by providing you with a way to accumulate tax-deferred retirement savings while you're preparing for retirement and a stream of income to use when you are in retirement.

When you invest in a variable annuity, the insurance company typically offers a selection of underlying mutual fund-like investments called subaccounts. You can choose from several professionally managed and diversified variable annuity subaccounts or portfolios based on your investment objectives, comfort level with risk and length of time until you retire.

There are several key features to consider with a variable annuity.

Tax-deferred growth

During the accumulation phase, increases in the value of the annuity are not subject to taxes until withdrawn.

Flexible income options

During the distribution phase, you may take income from a variable annuity in a number of ways:

  • All deferred annuities can be converted to a lifetime income stream.
  • You may also have the option to take systematic withdrawals, the amount of which can be adjusted at any time.
  • Some variable annuities enable the policyholder to elect an optional living benefit. Such benefits can provide certain guarantees for contract withdrawals for life. These benefits may require additional fees, charges, expenses or investment restrictions, and they may be subject to eligibility limitations.

Guaranteed death benefit

If the owner of the annuity passes away, the beneficiary is usually guaranteed the amount originally invested, minus previous withdrawals. Additional death benefit options may be available.

Avoiding probate

Variable annuity proceeds paid to the beneficiary upon death are excluded from estate probate. However, the proceeds are subject to ordinary income taxes and estate taxes.

Fees & expenses

Most variable annuities have two types of asset-based expenses: an insurance fee and an investment management fee. Annuities also can include optional insurance fees and an annual contract fee. The sum of these fees may be higher than fees charged on other types of investments.

  • Insurance fee – the annual insurance fee (commonly known as a mortality and expense charge) typically ranges from 0.65% to more than 1.75%. The difference in fees may depend on the pricing option the investor chooses.
  • Investment management fee – annuities charge investment management fees.
  • Additional insurance fees – some variable annuities offer optional insurance benefits such as enhanced death benefits or living benefits. The costs of these benefits vary by contract. As a general rule, investors should elect these types of benefits only if they anticipate using them, since the added cost will reduce the investment return.
  • Annual contract fee – variable annuities often assess an annual contract fee between $30 and $50. This fee may be waived if the policy value is above a certain amount, typically $50,000.

In addition to these fees, variable annuities are also subject to sales charges. A portion of the sales charge received by Edward Jones is paid to the financial advisor selling the annuity.

Important considerations

  • Withdrawals may have tax consequences and surrender charges.
  • Poor market performance can reduce contract value and guaranteed income payments.
  • The costs for the insurance guarantees and the subaccount management expenses reduce investment performance.
  • The guarantees provided by any type of annuity contract are based on the claims-paying ability of the insurance company.

Income annuities

Income annuities (sometimes referred to as "Immediate annuities" or "Deferred income annuities," depending on when income payments begin) offer a predictable guaranteed stream of income that you can't outlive.

With an income annuity, you give the insurance company a lump sum of money in exchange for a guaranteed stream of income. Once the money is given to the insurance company, you generally no longer have access to it. Therefore, income annuities are usually best suited for investors who want to maximize their income.

5 key features to consider with an income annuity

  • Income payments – generally, these remain level over time, and they can begin immediately or two to seven but no more than 10 years in the future.
  • Flexibility – there is generally little flexibility once payments begin.
  • Taxes – non-qualified immediate annuities may offer tax-advantaged payments when payments are considered part return of principal and part interest.
  • Income payment options – you or your beneficiary can receive income payments throughout your life or for a set period of time. Depending on the income payment option you select, your beneficiary may receive a death benefit should you pass away.
  • Fees & expenses – while no specific fees or expenses are taken out of the income payments you receive, the insurance company does factor fees and expenses into the income payment. Fees and expenses generally cover the insurance company’s administrative expenses, the cost of offering income payments for life or for the chosen period and profits to the insurance company and agent.

Important considerations

  • Contracts generally cannot be surrendered and should not be considered as a source of liquidity.
  • Clients are subject to inflation risk, as fixed-income payments may not keep pace with inflation.
  • Depending on the payment option elected at issue, a client may not receive any or all of their premium.
  • The guarantees provided by any type of insurance contract are based on the claims-paying ability of the insurance company.

Annuity taxation

Qualified taxation

  • A qualified annuity is taxed similarly to any other asset held within a qualified account such as an ira, 401(k), profit sharing plan or other tax-deferred retirement account.
  • Distributions will be taxed at the individual's marginal income tax bracket.

Non-qualified taxation

  • Income annuities will be taxed as part interest and part return of principle.
  • For non-qualified lump sum or partial annuity distributions, any withdrawal from the contract is interest first and taxed as ordinary income. Once the interest is fully withdrawn, principal is withdrawn from the contract and is not taxed.

Important information

Revenue Sharing Arrangement with Annuities and Insurance Companies

Annuity fees & compensation

Edward Jones receives various payments in connection with the purchase, sale and holding of annuities by its clients. Those payments include commissions, annual service fees and expense reimbursements. The firm also receives revenue sharing from some of its preferred annuities. For more information about revenue sharing, see the above link. Edward Jones financial advisors and equity owners benefit financially from the firm’s receipt of these fees and payments.

How we can help

Your Edward Jones financial advisor can help you determine whether an annuity makes sense for you. Talk to us about how we can help you define your goals, using specially designed tools, and then help you stick with the appropriate strategy designed to help achieve them.

Important information:

Variable annuities are offered and sold by prospectus. You should consider the investment objective, risks, and charges and expenses carefully before investing. The prospectus contains this and other information. Your Edward Jones financial advisor can provide a prospectus, which should be read carefully before investing.

Guarantees are subject to the claims-paying ability of the issuing company.

Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P., and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C.

Edward Jones receives payments known as revenue sharing from certain mutual fund companies, 529 plan program managers and insurance companies (collectively referred to as “product partners”). For more information see Revenue Sharing Disclosure.