Annuities are long-term financial products designed to provide a predictable income stream, often used as part of a retirement strategy. Offered by insurance companies, annuities can be tailored to fit individual needs, such as lifetime income, tax-deferred growth, or legacy planning.
How Annuities Work
When you purchase an annuity, you typically make a lump sum payment or a series of payments to an insurance provider. In return, the insurer promises to make periodic payments to you, either starting immediately or at some point in the future. The terms, payout structure, and duration of the payments depend on the specific annuity contract.
Annuities can be an appealing option for individuals looking for guaranteed income in retirement, especially for those who are concerned about outliving their savings. They are not meant for short-term goals, but rather for long-term income planning.
Why Consider an Annuity?
Annuities offer several potential benefits:
- Reliable income: Once payments begin, annuities can provide consistent income for a set period or for life.
- Tax-deferred growth: Earnings within the annuity grow without being taxed until withdrawals are made.
- Customizable options: Many annuities offer riders or add-ons that can provide benefits like inflation protection or death benefits for beneficiaries.
However, it’s important to weigh these benefits against the potential drawbacks, such as fees, limited liquidity, and possible surrender charges if you withdraw funds early.
Types of Annuities
There are several types of annuities, each serving different financial goals and risk profiles:
Fixed Annuities
Fixed annuities provide guaranteed payments and offer a predictable return. They are ideal for individuals who want stability and a low-risk way to generate income in retirement.
Variable Annuities
Variable annuities allow your contributions to be invested in a selection of funds, typically mutual funds. Payments can vary based on investment performance, offering potential for higher returns but with greater risk.
Indexed Annuities
Indexed annuities offer returns based on the performance of a market index, such as the S&P 500. While they offer the potential for higher returns than fixed annuities, they also include limits such as caps and participation rates.
Immediate vs. Deferred Annuities
Immediate annuities begin payments shortly after you make a lump sum payment, making them suitable for those who need income right away. Deferred annuities delay payments until a future date, allowing earnings to grow tax-deferred in the meantime.
Is an Annuity Right for You?
Annuities can be a valuable part of a diversified retirement plan, particularly for those seeking predictable income. They may be especially useful for individuals without a pension, or for those who want to supplement Social Security benefits.
That said, annuities are complex financial products. It’s important to carefully review contract terms, fees, and potential penalties before committing. Consulting with a financial advisor can help determine whether an annuity aligns with your long-term goals and risk tolerance.
Ethos Annuities
Ethos is an insurtech digital platform that is connected to top tier insurance carriers. It connects you to annuity providers (rather than underwriting contracts directly).
If you’re tired of random fees and unexpected markups, Ethos is a great company to consider buying an annuity from. Their platform shows their transparent fee explanations and avoids hidden commission markups. You can get a great idea of how much you would need to pay if you do end up buying an annuity from one of their insurance carrier partners.
Ethos also has advanced algorithms that can do fast pre-qualifications and online quotes. That way if you’re worried about wasting time and money on annuity applications, Ethos can give you a much quicker view of what annuities you could most likely obtain.
Plus, if you’re frustrated by financial jargon and confusing numbers, Ethos’ interface is easy to understand and use. They don’t want people to get lost when it comes to investing in the future.
Core Annuity Products Covered by Ethos
Multi-Year Guaranteed Annuities (MYGAs)
A Multi-Year Guaranteed Annuity (MYGA) locks in a guaranteed interest rate for a fixed term. You can choose between 3, 5, 7, or 10 year terms. These Ethos MYGAs typically offer better tax-deferred growth compared to standard bank CDs.
MYGAs are best for risk-averse savers who want to receive predictable tax-deferred growth. You can ladder different MYGAs over time to lock in good interest rates every few years. That way you aren’t “missing out” on high interest rate periods in the economy, but you aren’t committing super long and can withdraw money faster at the same time.
Depending on your annuity contract, after the current MYGA matures, you may be given the option to roll it over into another one, gathering more tax-deferred growth until you are ready to withdraw the funds. This flexibility makes Ethos MYGAs a very attractive option for those who want to see how the market is doing and gain tax-deferred growth every 3 to 10 years.
Fixed Indexed Annuities (FIAs)
A fixed indexed annuity (FIA) has a rate that is linked to a market index (usually the S&P 500). Linking to a market index means that when the market goes up and is doing very well, the FIA can earn more.
However, it is important to know that FIAs have upside caps and participation rates that can limit how much you can gain.
So why would you get an FIA over a regular annuity? Well, FIAs also have downside floors. These serve as effective loss protection so that if there is market volatility and widespread losses, your fixed indexed annuity will still not drop below 0%. Compare this to traditional stock market investments, where people could lose their entire savings and owe debt if they make high-risk choices.
FIAs are best for safe investors who want moderate growth without risking their principal.
Single Premium Immediate Annuities (SPIAs)
A single premium immediate annuity (SPIA) lets you convert a lump sum into immediate, guaranteed monthly income. These annuities usually start paying out to you within 30 to 365 days, though they obviously provide less growth than other traditional annuities.
SPIAs are best for recent retirees who need a fast personal pension to cover fixed living expenses right away. This won’t technically be a pension, but it can help you pay for retirement expenses.
Other Products
Ethos can also connect you to suitable life insurance products if you’re considering a policy. Its digital platform makes it fast and easy to get life insurance coverage (while skipping the typical frustrating medical exams that come with life insurance). Life insurance is highly recommended if you have any loved ones or dependents, financially protecting them in case you pass away. It can also be used for estate planning.
Key Benefits of Using Ethos for Annuities
Speed and Accessibility
Feeling overwhelmed by how to approach buying annuities? It’s a common sentiment. Ethos prioritizes accessibility and financial education so you can learn about and buy annuities more easily.
With Ethos, you don’t have to go through the lengthy process of scheduling an in-person meeting with an advisor. Instead, you can find all the resources needed through their platform, including quotes, annuity education, and how to submit a digital application.
Carrier Financial Strength
Ethos annuity contracts are backed by established, reliable life insurance companies that have high A.M. Best ratings. That means they have robust financial stability and you don’t need to worry about where the money will come from once the annuity starts paying out.
Tax-Deferred Growth
Tax-deferred growth can provide a lot of value over time. The earnings that come with the Ethos annuities will accumulate tax-free until your withdrawals actually begin, making it easier to compound more money in the meantime.
Principal Protection & Lifetime Guarantees
You may have heard that the stock market is a volatile beast. Any market drops can hurt how much investors receive, which is particularly painful for long-term investments. Through Ethos annuities, you can obtain significant insulation from stock market declines, and you can even opt for optional lifetime payout riders.
Also, purchasing lifetime guaranteed income annuities mean that you can eliminate longevity risk. It’s an issue where people only prepare savings for a certain amount of years post-retirement, and financially struggle when they outlive their expected longevity. It can happen often with people who face medical challenges and diagnoses.
Control
When buying an annuity, you can choose your preferred contract, rates, and terms. There is a lot of control you get. For example, you don’t need to rely on a company contributing to your retirement income. You don’t need to worry about your traditional retirement accounts or investments being your sole options. Annuities are giving more control back to the regular person.
Trade-Offs, Limitations, and Considerations
Surrender Charges & Liquidity Constraints
One issue with annuities is the liquidity problem. With other types of short-term investments and savings accounts, you may be able to withdraw early if you really need to.
If you start withdrawing money early from your annuity for whatever reason, you may have to pay early fees. There may also be a lock-in period that prevents you from withdrawing money too early.
For those who are worried about liquidity, consider a MYGA or other short-term annuity. That way in a year or three, you can start getting paid out.
If you want an even shorter annuity term, there are so-called “immediate annuities”.
Growth Caps vs. Direct Market Investing
Ethos annuities come with participation limits on indexed products. Essentially, they trade maximum stock market upside for predictable principal safety so that even though the potential upside is limited, the potential losses are also limited.
If you expect to make a LOT of money from annuities over time, you may want to look for other types of investments first. Annuities are about guaranteed income that is also minimizing risks, such as market downturns. You won’t win the lottery by buying an annuity, but sometimes people who invest directly in a market could “win big”.
Digital Self-Service vs. Comprehensive Wealth Management
Taxes, legal compliance, and portfolio diversity are all concerns especially for those who have a lot of wealth. Not preparing your estate properly, for example, can lead to serious issues down the line for your heirs.
Investors with highly complex estates or cross-generational tax needs should still consult with a dedicated human fiduciary advisor as needed.
Fixed Annuity Concerns
If you opt for a fixed annuity for your life, it can be a large investment that takes potentially decades before you can start withdrawing without fees. You’d be locking in the annuity interest rate, and some people do not enjoy a lifetime annuity that could miss out on any future increases in interest rates.
Not Backed by FDIC
Unlike bank products and deposits, the annuities you buy may not be backed by FDIC insurance. You have to ensure the carrier whose annuity you are purchasing has reliable financial strength and the ability to pay out once your annuity contract matures.
Ethos does a good job partnering with top-rated insurance carriers that have excellent ratings in financial stability over the years. However, it is important to note that this isn’t the same as being backed by FDIC insurance for banks, which many people still see as the reliability standard.
Who Should Consider an Ethos Annuity?
Some people benefit far more from annuities, and Ethos annuities, in particular. If any of the following resonates with you, you should consider an Ethos annuity.
You Want to Lock in High Fixed Interest Rates
Conservative investors who want to minimize potential losses should consider Ethos annuities that allow you to lock in a high interest rate and nail it there for the rest of the annuity. This can let you secure retirement income through the tax-deferred growth in the years to come.
You can also consider the fixed rate MYGA annuities if you don’t want to miss out on future higher interest rates. These can give you high interest rate returns and benefits.
You Need More Tax-Deferred Growth Options
Ethos annuities are great in that they can provide you with extra tax-deferred investment options. This is particularly useful for individuals who have already maxed out their other accounts and options, such as their 401(k) and IRA contributions.
Retirees Who Need Guaranteed Income
The retirement crisis known as Peak 65 is very real and concerning. Millions of retirees are turning 65 each year and yet still remain unable to afford their retirement. Social Security Benefits may bring delays or not enough funds, depending on the retiree’s personal situation.
If you go for an immediate or short-term annuity as you approach retirement, you can quickly start making gains towards more retirement income.
If you’re young but are worried about not having enough savings for retirement, and traditional pension plans and savings accounts aren’t enough, you can also consider an annuity to support your future self. Millions of Americans are opting to purchase an affordable annuity now so they can remain protected when they reach retirement age through these more self-reliant investments.
Final Thoughts
Annuities are not one-size-fits-all, but they can be a powerful tool for those looking to secure income during retirement. Understanding how they work, the different types available, and the pros and cons can help you make an informed decision about incorporating them into your financial strategy.
Disclaimers:
FastBreak™ by Gainsbridge Disclaimers
¹Annual Percentage Yield (“APY”) rates are subject to change at any time, and the rate shown may no longer be current.
²Withdrawals above 10% free withdrawal amount are subject to a withdrawal charge and market value adjustment.
⁴A.M. Best Company assigns ratings from A++ to S based on a company’s financial strength and ability to meet obligations to contract holders. A- (Excellent) is the 4th highest of 16 ratings. Visit www.ambest.com.
SteadyPace™ by Gainsbridge Disclaimers
¹Annual Percentage Yield (“APY”) rates are subject to change at any time, and the rate shown may no longer be current.
²Withdrawals made prior to age 59 ½ are subject to an IRS early withdrawal tax penalty.
ParityFlex™ by Gainsbridge Disclaimers
¹Provided your account value hasn't gone to $0 due to excess withdrawals.
Ethos Disclaimers
¹Income through annuitization or guaranteed income rider. Guaranteed income rider optional / elected at issue for add'l cost. Benefit base determines income and not available for withdrawal. Withdrawals above guaranteed payout may reduce future payments. Guarantees subject to claims paying ability of issuer. Accumulation value growth not guaranteed on all types of annuities. May lose value. Index-linked growth is subject to caps and participation rates. Surrender charges and rider fees may apply and can reduce account value/amount received. Withdrawals subject to income tax and may be subject to a 10% fed tax penalty before age 59.5. Annuities are long-term products and may not be suitable for everyone. Consult licensed financial professional / qualified tax advisor.