Does an Annuity Make Sense for Your Portfolio?

Does an Annuity Make Sense for Your Portfolio?

If you have heard of annuities, you might wonder if they are right for you. Some advisors use annuities as part of the financial strategies that they create for their clients. Other advisors aren’t as much a fan of them.

Sometimes annuities get a fair amount of negative press. However, when they are used as a solution and are structured properly, annuities can actually be a great solution as part of your portfolio.

So, how can you tell if an annuity makes sense for you? Here are some reasons why one of these guaranteed insurance contracts could be a good addition to your portfolio.

Let’s take a look at how fixed annuities and fixed index annuities might be of benefit.

Stock Market Jitters

Some folks might not be as keen on the stock market over time. Black swan events like the Covid-19 pandemic can roil the markets for a period of time.

For many people nearing retirement, the thought of losing money due to market drops can sometimes be hard to bear. If you are within five years of retirement or you retired less than five years ago, then you might not have much time to make up for any big losses sustained in a short time.

One prospective solution for some retirement money may be a fixed index annuity. This type of annuity can only go up and not down in value due to how their index benchmark declines.

Indexed annuities are tied to an underlying financial benchmark such as the S&P 500 price index. When the index rises in value, the insurance company calculates your interest earnings based on a portion of that growth.

When the index falls in value during a given crediting period, your money won’t decline due to the index drop. Rather, it will simply earn no interest for that period. In other words, your principal and the interest earnings you already have are “locked in.”

Market-based investments, from stocks to mutual funds and ETFs, tend to fluctuate in value. In other words, they have ups and downs at different points in time.

But when they drop in value, you have to wait until they climb back up to their previous highs before you can make any more money. Not so with an indexed annuity.

At the beginning of a given crediting period, the contract will note the value of the benchmark index and credit interest (or no interest) based on the index’s ups or downs from there.

Guaranteed Lifetime Income

What is another reason that retirement savers have annuities? They want a guaranteed income that lasts as long as they might live.

People are living longer, thanks to advances in medicine and technology. Now a common question for tens of millions of Americans is: “When I get to retirement, what are my chances of running out of income?”

An annuity can be structured to pay you guaranteed monthly income for as long as you live or even for a specific period.

Not only that, annuities are the only vehicle on the planet besides Social Security that can truly pay you a guaranteed income for life. Annuities have a monopoly on lifetime income for retirement in this regard.

Smoothing Out Portfolio Volatility

For many retirement investors, smoothing out the volatility of their portfolio for retirement is attractive. For one, it helps reduce the unpredictability of sequence of returns risk.

Since they guarantee to protect your principal, fixed annuities and fixed indexed annuities may be worth a look here. With a fixed annuity, your money will grow at a certain interest rate that is guaranteed.

Again, the indexed annuity will let your money earn interest depending on the movements of its underlying benchmark.

Planning for Financial Survivorship

One crucial part of retirement income planning is making sure you have enough income for your partner. If you have a spouse, you might worry about whether your retirement money will be enough to cover their living expenses for as long they live.

Annuities can be structured with “joint life payouts.” A joint life payout is a guaranteed payout thats last for both you and the surviving partner’s lifetimes. The only disadvantage to doing this is that the payout amount will be less than what you would get if you opted for a straight life payout instead.

There are ways to plan for spousal income with both payout options. Your financial professional can discuss these scenarios with you.

Guaranteed Growth for Your Money

Guaranteed growth is an important matter for some people. If you want to know, down to the dollars and cents, how much interest you will earn, a fixed annuity may be right for you.

Fixed annuities provide a guaranteed rate of growth for your money. That growth also comes with tax benefits. Your money grows tax-deferred until you start taking withdrawals from your annuity contract.

In these fixed contracts, the insurance company is contractually responsible for paying you a certain specific rate each year. The longer the contract is, generally the more interest your money will earn each year.

More Growth Than What the Bank Offers

Do you want for your money to earn more interest than what the bank is offering? Bank CDs and other fixed-interest products at banking institutions have been around for years.

But with interest rates as low as they are, their earning potential may not be all that attractive. In fact, many new bank products are paying virtually nothing. 

Historically, insurance companies tend to pay 20-30% more interest with annuities than the fixed-interest products you may find at your local bank. You can shop the fixed annuity market to find the most competitive rates for your portfolio as part of your fixed-asset holdings.

Want to Leave a Legacy for Heirs, But You Have Health Issues

If you want to leave money for loved ones in a tax-efficient manner, life insurance is often a pretty effective solution. But sometimes people can’t pass underwriting for life insurance.

Annuities resemble life insurance in that the money that is placed inside them is exempt from the probate process. As long as they are listed on your annuity contract, your beneficiary or beneficiaries will quickly receive their money within a short period of time after your death. Also, there are no underwriting requirements with standard annuity contracts.

All things considered, the death benefit proceeds from an annuity are usually taxable for heirs. Your tax planning professional and an estate planning attorney can help you weigh the pros and cons of this.

Being Ready for Long-Term Care Expenses

You might be aware of the costs of long-term care. But perhaps you don’t want to buy long-term care insurance or pursue other options that force you to pay out of pocket. Good news, there are alternatives that are available.

Among your options are annuities available that are designed to help defray the costs of long-term care or disability. Once you start taking income from the annuity, then the monthly amount that you receive will be enhanced, as long as you meet a qualifying care situation for this benefit.

Your monthly income may double or even more, allowing you to cover the expenses of your long-term care situation with this enhanced income. Some contracts have this benefit go away after a certain period, such as after 60 months, or until the money in your contract goes to zero. Other contracts may keep paying you even if the money in your contract is depleted.

Check the specific terms and conditions of any annuity contracts you may be looking at for details. Your financial professional can help you understand these terms and how they might apply as well.

Does an Annuity Make Sense for You?

Annuities can provide people with many benefits, including guaranteed income, guarantee of principal, and healthcare benefits. Consult your financial advisor to find out more about annuities and whether they are right for you.

What if you are looking for a financial professional to guide you in exploring your annuity options? No sweat, many independent financial professionals are available to assist you at

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to go over your personal goals, concerns, and financial situation. Should you need a personal referral, call us at 877.476.9723.

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