What is an annuity?

Annuities are investment products sold by insurance companies. Consumers buy annuities as way to generate interest on their savings, generate income, or both. A consumer pays a lump sum or makes periodic payments to the insurance company offering the annuity. In exchange, the annuity provides periodic payments to the consumer.

What are the types of annuities?

Fixed annuity: An insurance company agrees to periodic payments of a specific dollar amount, based on an interest rate. Example: You use $50,000 in cash to buy a fixed annuity. In return, the insurance company agrees to:

  • Hold your money for 10 years, during which time you have to pay a penalty to access it (this 10-year period is known as a surrender period)
  • Pay you a rate of interest on the money, say five percent.
  • After 10 years, begin making payments to you of $500 per month.
  • Make these payments to you for a certain number of years, or for as long as you live, depending on which option you bought.

Indexed Annuities: An insurance company guarantees a minimum rate of return on your money (say five percent), but also offers the possibility of additional earnings by linking the interest rate to a published index such as the Standard & Poors 500. Example: You use $50,000 in cash to buy an indexed annuity. In return, the insurance company agrees to:

  • Hold your money for 10 years, during which time you have to pay a penalty to access it. This 10-year period is known as a surrender period.
  • Pay you a rate of interest on the money, say five percent – or more, depending on the index used.
  • After 10 years, begin making payments to you of $500 per month – or more, depending on the performance of the index.
  • Make these payments to you for a certain number of years, or for as long as you live, depending on which option you bought.

Variable Annuities:  An insurance company pays a rate of return on your money tied to the performance of investments in the stock market. Unlike fixed or indexed annuities, the amount of money you have in a variable annuity can lose money. For this reason variable annuities are regulated as insurance products by the Department of Insurance and also regulated as securities by the Missouri Secretary of State’s Office. Example: You use $50,000 in cash to buy a variable annuity. In return, the insurance company agrees to:

  • Hold your money for 10 years, during which time you have to pay a penalty to access it. This 10-year period is known as a surrender period.
  • Pay you a rate of interest on the money, based on the performance of the company’s investments in the stock market.
  • After 10 years, begin making payments to you of $500 per month – or more or less, depending on the performance of company’s investments in the stock market.
How soon will I start receiving payments on my annuity?

You can buy an immediate or deferred annuity. An immediate annuity begins making payments to you right away. A deferred annuity begins paying after a surrender period, say 10 or 20 years. This allows for a longer accumulation time for the insurer to invest your premiums, so the annuity (your investment) builds in value.

What affects the amount of my payments?
  • The amount of principal invested. The more money you invest, the larger your payments will be. Likewise, withdrawals and surrenders from the annuity will decrease the principal invested and ultimately decrease the amount on which to base income payments.
  • The length of time you own the annuity. The greater the length of time, the larger the interest earnings.
  • The interest rate on investment earnings. The higher the interest rate, the larger the interest earnings.
  • Your life expectancy. Annuities are vehicles for continued income after retirement. Therefore, the longer the purchaser is expected to live, the smaller the income payments.
What fees and/or charges is my annuity subject to?

Insurers typically charge fees to cover sales commissions and other business expenses. A variable annuity may charge an investment management fee. These fees are usually added to the premiums you pay, or subtracted from the payments you receive.

What should I consider before investing in an annuity?
  • If you have a financial advisor, ask whether an annuity would be a suitable part of your investment portfolio. As with any investment, evaluate an annuity not as a stand-alone product, but in the larger context of your retirement plan.
  • Evaluate your desired risk – are you a conservative or aggressive investor? Fixed annuities are lower in risk than variable annuities, but they have less earning potential. Carefully consider how much of your investment you can afford to lose before selecting an annuity.
  • Consider your length of investment. How soon do you need this retirement income? A 20-year surrender period is probably more suitable for a 45-year-old than for a 70-year-old. Annuities are intended to be long-term investments. They provide the most benefit when your money is left in the annuity to grow and earn interest over time. Early withdrawal and surrender of annuities depletes their value as an investment tool. 
  • How much income do you need from this annuity. Annuities are often called the opposite of life insurance because they protect against the financial risk of outliving your money. When considering how large an annuity to purchase, be aware of your future income needs throughout the course of your retirement.
  • Carefully examine the exact annuity you are purchasing. Missouri law allows consumers a “free look” period. If you are unsatisfied with the product within 10 days of receiving your policy or contract, you can cancel the policy and get a return of all premium payments.
How can I find out if the company I’m considering for my annuity is reputable?

The Missouri Department of Insurance keeps a record of each insurance company’s consumer complaint history, known as a complaint index. The higher a company’s complaint index, the more cautious you should be. You can view our Complaint Index Report here. If you have any questions, call the Insurance Consumer Hotline, 800-726-7390. Our representatives can also help you research the financial health of the insurance company, an important consideration when buying a long-term investment product like an annuity.

What do I do if a deceased loved one purchased an annuity in Missouri?

You can use the Life Policy Locator service to help locate missing annuities.

What are the suitability standards insurance producers should consider when discussing annuities with prospective clients?

Download DIFP's Suitability publication.