The following list represents our current picks for the top 10 best annuity companies of 2020. These companies represent the annuities that we believe are the best in class.
2020 Best Annuity Companies
Please click on a company name to find out more about each individual carrier and the products offered. If you have any questions, please don’t hesitate to give us a call.
|Company||A.M. Best Rating|
|Mutual of Omaha||A+|
The fundamental objective of every retirement plan is to ensure sufficient resources are available for a comfortable retirement. The trick, though, is determining exactly what is “sufficient” and figuring out how to get there.
We don’t all retire at the same age. We don’t all have the same expenses. And, of course, we don’t all live to the same age.
As medical treatment and technology have improved and life expectancies have increased, longevity risk – the risk of outliving your retirement savings – has become an increasing concern in retirement planning.
At the same time, private pensions have become exceedingly rare. Sure, there’s Social Security, but it’s infrequently sufficient to meet all regular expenses.
A retirement plan needs to include an additional, reliable income source to make up the difference.
Annuities are a financial product specifically designed to address longevity risk by providing a predictable income stream guaranteed for life.
Although they are not a new concept, modern annuities adapt a proven retirement-planning tool to the modern economy, allowing individual retirees to choose an annuity suited to their individual financial situation, needs, and priorities.
What are Annuities?
Annuities are a insurance-investment hybrid offered by life insurance companies.
While they come in a variety of shapes and sizes, the basic structure is that the individual purchasing the annuity (the “annuitant”) pays an up-front premium to the insurer in exchange for the insurer’s promise of guaranteed future payments on a defined schedule.
With traditional life annuities, the payments are guaranteed for life, like a private pension you purchase for yourself.
The primary (but by no means only) purpose of annuities in financial planning is to ensure a consistent, life-long income stream – thereby insuring against longevity risk.
For this reason, annuities are sometimes described as “reverse life insurance.”
And, because an annuity’s value grows over time, it also acts as a savings or investment vehicle.
Annuities are highly customizable and can vary considerably between insurance companies and even between specific annuities.
An individual annuity is defined according to four chief attributes:
(1) how premiums are paid;
(2) whether payments are immediate or deferred;
(3) the schedule and terms under which payments are made; and
(4) the formula used to measure the annuity’s growth.
Purchasing an Annuity
Annuity premiums can either be due in full at the time of the contract (“single premium”) or paid over time via multiple payments (“flexible premium”).
Flexible premium annuities are generally set up so that the annuitant pays premiums over several years, subject to annual minimum contributions but with the option of making additional payments.
The flexible structure allows you to adjust contributions based on current income and market trends and anticipated future income needs.
Single premium annuities are typically purchased using a lump-sum cash payment, whether from savings or from liquidating other assets.
The premium can also come from the cash value of a life insurance policy through a 1035 Exchange.
Or, under certain circumstances, IRA or 401k funds can be applied toward a Qualified Longevity Annuity Contract (“QLAC”), sometimes referred to as a “personal pension within IRA.”
Non Qualified vs Qualified
Most annuities are “non-qualified,” which means premiums are paid using already-taxed money.
Payments received from a non-qualified annuity are only taxable to the extent the payment includes growth (i.e., returned premium is not taxable).
“Qualified” annuities, by contrast, are purchased through a qualified retirement plan or IRA using pre-tax money. Qualified annuity payments are taxable income except to the extent a portion of premiums was paid using already-taxed money.
With both qualified and non-qualified annuities, growth is tax-deferred, meaning no income tax is owed until payments are actually received from the insurer.
The period during which the annuitant pays premiums to the insurer, and the annuity is growing but not yet paying out, is known as the “accumulation phase.”
The accumulation phase ends when the annuity begins paying out, at which point the “annuitization phase” beings.
The term “annuity” is derived from the lifetime payments promised to Roman soldiers upon the conclusion of their service term.
Nowadays, annuities still commonly provide for lifetime payments (“life annuities”), but they are also available with payments guaranteed for a defined period of years, or even as a lump sum.
Immediate vs Deferred
Immediate annuities begin paying out on the first payment period after the contract is executed. An immediate annuity purchased in January might make its first payment in February, for instance.
A single premium immediate annuity (“SPIA”) requires one lump-sum premium and then begins making annuitized payments immediately thereafter. SPIAs are popular with retirees looking to convert a portion of retirement savings into a guaranteed stream of lifetime income.
Deferred annuities do not begin paying out until a future date identified in the annuity contract. The deferral period is generally somewhere between one and ten years, but longer deferrals are also available, particularly with flexible-premium annuities.
The advantage of a deferred annuity is that the premiums have a longer time to grow prior to annuitization and, therefore, payments are larger than an immediate annuity with a comparable premium.
The combination of premium growth, compounding, and tax-deferred treatment gives deferred annuities a notable advantage over other low-risk savings and investment strategies.
Because no income tax is owed until payments are received, money that might otherwise have gone toward taxes instead continues earning interest.
Once payments commence, annuities usually pay out on a monthly, quarterly, or yearly basis.
The actual payment amount depends on multiple factors, including the annuitant’s life expectancy, the amount of premium paid, and the growth earned by the annuity.
Payments can be in fixed or variable amounts, depending in part on how growth is measured.
There are three basic methods of measuring an annuity’s growth: fixed, variable, and indexed.
Fixed annuities are the original form and the most predictable. A fixed annuity grows at a pre-set, guaranteed interest rate that serves as a hedge against economic downturns and market volatility.
The rate can be concrete for the life of the annuity or periodically adjusted to reflect prevailing rates, with a guaranteed minimum.
The growth potential is not as great as with variable or indexed annuities, but fixed annuities offer failsafe earnings and essentially zero risk of loss.
The stability is reflected in the payments provided by fixed annuities, making them highly useful in budgeting during retirement.
The growth of a variable annuity, and therefore the payment amounts, depends on the performance of investments selected by the annuitant from among multiple options offered by the insurer.
Due to changing growth over the financial cycle, variable annuities have more of the flavor of an investment than fixed annuities.
The growth potential is correspondingly higher, but there is also a risk of loss, including loss of principal.
Indexed annuities represent an effort by insurers to find a happy medium between the higher growth potential of variable annuities and the security and stability of fixed annuities.
An indexed annuity’s growth is linked to an equity index, such as the S&P 500, allowing for increased returns during strong markets.
But most indexed annuities also come with a guaranteed minimum return, no-loss guaranty, or floor on losses in down markets.
The combination of growth potential and mitigated risk has led to a rapid increase in the popularity of indexed annuities since their introduction.
In exchange for the insurance company’s agreement to absorb some or all losses in down markets, it receives a share of an indexed annuity’s growth when markets are up.
This typically comes in the form of either a growth ceiling (or “cap rate”) above which gains belong to the insurance company – or as a set percentage of earnings paid to the insurer.
For example, if an indexed annuity has an annual cap rate of 6.00%, and the applicable market increases by 8.00%, the annuity’s growth rate would be 6.00%, and the other 2.00% would go to the insurance company.
Indexed annuities usually allow for some flexibility according to the risk level the purchaser is willing to assume.
In general, a fixed annuity with greater growth potential in the form of a higher cap rate would also have lower guaranteed returns or allow some limited losses.
On the other hand, a higher guaranteed rate of growth typically translates to a lower cap rate.
Options for Annuity Withdrawals
A withdrawal occurs when the annuitant taps the value of the annuity ahead of schedule and is therefore distinct from regularly scheduled payments.
Withdrawal options vary from company to company and product to product and often come with a fee.
Even so, an annuitant might want to make a withdrawal in response to a large unexpected expense or emergency or for a one-time purchase.
A “surrender” is when an annuitant cashes out the annuity for a single, lump-sum payment. Surrendering an annuity terminates the contract along with the right to receive any future payments.
Annuities usually have a surrender fee, typically measured as a percentage of the annuity’s value. However, most annuity contracts gradually decrease and phase out the surrender fee after the contract has been in place long enough.
Some annuities waive surrender fees altogether upon the occurrence of a specified event, such as a serious medical illness or injury or the annuitant’s permanent need for long-term healthcare.
A “partial withdrawal” is when the annuitant accesses some of the annuity’s value but allows the contract to otherwise remain in place.
Partial withdrawals often come with a fee until the annuity has been in place long enough, but some permit early withdrawals of a specified percentage of the annuity’s value without penalty.
Importantly, partial withdrawals result in a decrease in the amount of future payments, and the amount of any withdrawal which constitutes growth will be taxable income.
Additionally, premature withdrawals from a qualified annuity result in an IRS penalty.
Annuity Survivor Benefits
Traditional annuities did not offer any survivor benefits. When the annuitant died, the right to payments ceased. This arrangement created the risk of dying early and not receiving back even the premium used to purchase the annuity.
Due to this concern, most modern annuities include some form of survivor benefits allowing for payment to a designated beneficiary upon the annuitant’s death if the annuity has not yet paid out a threshold amount.
Survivor benefits are usually based on the premium paid compared to the total amount paid out.
A popular provision gives a surviving beneficiary the right to receive a refund of any premium left over after subtracting the total payments received by the annuitant.
Alternatively, a life annuity might require payments to a survivor if the annuitant does not live to a specified age.
Nearly all deferred annuities will pay the entire annuity value to a named beneficiary if the annuitant dies before payments commence.
In most cases, a surviving beneficiary can choose between accepting the annuity’s value as a lump sum or through multiple payments over an extended period.
If the beneficiary is a surviving spouse, he or she usually also has the option of allowing the annuity to remain in place under the same terms.
IRS rules relating to a beneficiary’s receipt of annuity payments are complex, and a lot can depend on the precise language of the specific annuity contract.
It is a good idea for anyone inheriting rights to an annuity to consult with an accountant or tax attorney before making any decisions about how to accept payment.
Popular Types of Annuities
Different types of annuities vary as to key features like how long payments continue, whether survivors have any right to payments following the annuitant’s death, and how the annuity is funded.
Importantly, an individual annuity can have features of more than one type of annuity (e.g., a SPIA can also be a life annuity).
Though the precise terminology may vary between insurance companies, these are some popular forms of annuities:
Single Premium Immediate Annuity (SPIA):
A SPIA is an annuity funded with a single, lump-sum premium payment that begins paying out immediately.
SPIAs are useful in converting substantial current liquidity, such as from accumulated retirement savings or proceeds of a legal-settlement, into a long-term income stream.
Purchasing a SPIA with periodic payments roughly equal to fixed expenses (e.g., health insurance, real estate taxes) is a popular strategy in retirement planning.
Also referred to as a “life income annuity,” a life annuity provides guaranteed income for the life of the annuitant.
Upon the annuitant’s death, payments cease, and there are no payment rights vested in survivors. Life annuities are a time-tested means of insuring against longevity risk.
Life with Premium Refund:
This type of annuity works like a life annuity except that if, upon the annuitant’s death, the annuity has not yet made payments totaling at least the amount of premium paid, the remainder is refunded to a designated beneficiary or to the decedent annuitant’s estate.
Life with Period Certain:
The annuity pays out for the longer of the life of the annuitant or a defined number of years. If the annuitant dies before the defined period expires, remaining payments are paid out to a designated beneficiary or to the estate.
Joint and Survivor Income Annuity:
The annuity is guaranteed to pay out for the lives of two annuitants (usually spouses). Depending on the contract language, the payment amount will either stay the same or will be reduced upon the death of the first annuitant.
These annuities can also be set up so that if a primary annuitant dies first, payments are reduced, but if the secondary annuitant dies first, payments stay at the same amount.
Period Certain Annuity:
An annuity that pays for a “period certain” or a “certain period” pays out for a defined number of years regardless of the annuitant’s lifespan.
If the annuitant is still living at the end of the period, payments cease.
If the annuitant dies during the period, payments are made to the annuitant’s estate or to a named beneficiary for the rest of the period.
Multi-Year Guaranteed Annuity (“MYGA”):
An MYGA is a specialized deferred annuity under which the annuitant makes a lump-sum premium payment to the insurer, and the insurer retains the premium for a defined period (usually three to ten years) during which it earns interest at a fixed rate.
At the end of the period, the annuitant can accept a lump-sum payment, roll over the funds into another MYGA, or receive annuitized payments over an extended period.
An MYGA allows the annuitant to take advantage of tax-deferred growth with minimal risk in advance of retirement.
Structured Settlement Annuity:
Legal settlements that are “structured” involve multiple payments over time – generally to reduce tax liability, preserve Medicaid eligibility, and/or to ensure a long-term income stream to the injured party.
To facilitate the structured settlement, the defendant’s insurance company can purchase an annuity for the benefit of the plaintiff.
Structured settlement annuities are usually, but not always, paid for a period certain.
Charitable Gift Annuity (“CGA”):
A CGA is a contract between a donor and a large charity or non-profit organization like a university.
The donor agrees to make a large contribution to the non-profit and, in exchange, the non-profit invests the money and makes annuity payments to the donor for the rest of his or her life.
The donor receives a partial current-year tax deduction, and the non-profit keeps the funds left over after the donor’s death.
An Annuity 1035 Exchange is not a specific type of annuity but, instead, a means of converting an existing cash-value life insurance policy into an annuity without incurring any immediate tax consequences.
In a typical scenario, someone who has a whole-life policy with substantial cash value reaches retirement age and has less of a need for life insurance.
Through a 1035 Exchange, he or she converts the policy’s cash value into an annuity to help fund retirement.
The 1035 exchange avoids the big tax bill that might otherwise be due for the policy’s growth had the insured simply surrendered the policy for cash.
The new annuity inherits the tax basis of the prior whole life policy.
There are a lot of nuances when it comes to annuities and knowing which companies offer the best annuities for your specific need is important to make sure you get the best annuity for you, based on your specific needs, goals and objectives.
If you are in the market for an annuity or have any questions, please give us a call today for a complimentary strategy session with a seasoned professional.