How do annuities work

All guarantees and protections are subject to the claims-paying ability of the issuing insurance company, but the guarantees do not apply to any vairable accounts, which are subject to investment risk, including the possible loss of principal. Annuity beneficiary form. Annuity buyer's guides. Variable annuities are sold by prospectus. Both the product and underlying fund prospectuses can be obtained by visiting Nationwide.

Indexed annuity contracts also offer a specified minimum that the contract value will not fall below, regardless of index performance. After a period of time, the insurance company will make payments to you under the terms of your contract.

A fixed indexed annuity is not a stock market investment and does not directly participate in any stock or equity investment. Before deciding on an annuity, you should consider your income needs, risk tolerance and investment objectives. Guarantees are subject to the claims-paying ability of Nationwide Life Insurance Company.

Agents Financial professionals Partners. Clipboard-flat Claims Envelopes-flat Pay a bill. All insurance products ». For your ride. Sometimes riders are available that can be attached to your annuity contract to give you extra options. A fixed annuity is fairly straightforward.

With it, the insurance company promises you a set rate of interest that is locked in rather than being tied to market rates. The amount of your future income stream will be based on the amount of your payments and the return of the investments you choose within your annuity, as well as any fees or other expenses the annuity charges. While a variable annuity may give you a chance for better returns and a higher payout, it could just as well result in a lower-than-anticipated income in retirement.

Indexed annuities are somewhat of a mix between a fixed and variable annuity. With an indexed annuity, you can get a base amount of guaranteed income. Who regulates annuities can depend on the type of annuity you buy. State insurance commissioners regulate both fixed annuities and indexed annuities. You can make sure your insurance broker is registered to sell annuities in your state before you make your purchase by checking with your state insurance commission.

The Securities and Exchange Commission regulates variable annuities. You can use BrokerCheck to see if your broker or adviser is registered. The company can help you find the right insurance agent for your unique financial objectives. Your web browser is no longer supported by Microsoft.

Update your browser for more security, speed and compatibility. If you are interested in learning more about buying or selling annuities, call us at Annuities View Subpages. What Is an Annuity? Annuities Explained. Indexed Annuity. Buying an Annuity. Reasons to Buy an Annuity. Current Rates. Immediate Annuity Calculator. Structured Settlements View Subpages.

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The Selling Process. Reasons to Sell. Selling for Retirement. Cash Out. Partial vs. Annuities are mainly used for retirement purposes and help individuals address the risk of outliving their savings. Annuities are designed to provide a steady cash flow for people during their retirement years and to alleviate the fears of outliving their assets. Since these assets may not be enough to sustain their standard of living , some investors may turn to an insurance company or other financial institution to purchase an annuity contract.

As such, these financial products are appropriate for investors, who are referred to as annuitants, who want stable, guaranteed retirement income. Because invested cash is illiquid and subject to withdrawal penalties, it is not recommended for younger individuals or for those with liquidity needs to use this financial product.

An annuity goes through several different phases and periods. These are called:. These financial products can be immediate or deferred. Immediate annuities are often purchased by people of any age who have received a large lump sum of money, such as a settlement or lottery win, and who prefer to exchange it for cash flows into the future. Deferred annuities are structured to grow on a tax-deferred basis and provide annuitants with guaranteed income that begins on a date they specify.

Agents or brokers selling annuities need to hold a state-issued life insurance license, and also a securities license in the case of variable annuities. These agents or brokers typically earn a commission based on the notional value of the annuity contract. Annuities often come with complicated tax considerations, so it's important to understand how they work. As with any other financial product, be sure to consult with a professional before you purchase an annuity contract.

Annuities usually have a surrender period. Annuitants cannot make withdrawals during this time, which may span several years, without paying a surrender charge or fee. Investors must consider their financial requirements during this time period. For example, if a major event requires significant amounts of cash, such as a wedding, then it might be a good idea to evaluate whether the investor can afford to make requisite annuity payments.

Contracts also have an income rider that ensures a fixed income after the annuity kicks in. There are two questions that investors should ask when they consider income riders:. Individuals who invest in annuities cannot outlive their income stream, which hedges longevity risk. So long as the purchaser understands that they are trading a liquid lump sum for a guaranteed series of cash flows , the product is appropriate.

Some purchasers hope to cash out an annuity in the future at a profit, however, this is not the intended use of the product. Defined benefit pensions and Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass. Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue.

As mentioned above, annuities can be created so that payments continue so long as either the annuitant or their spouse if survivorship benefit is elected is alive.

Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives. Annuities can begin immediately upon deposit of a lump sum, or they can be structured as deferred benefits.

The immediate payment annuity begins paying immediately after the annuitant deposits a lump sum. Deferred income annuities, on the other hand, don't begin paying out after the initial investment.

Instead, the client specifies an age at which they would like to begin receiving payments from the insurance company. Annuities can be structured generally as either fixed or variable:. While variable annuities carry some market risk and the potential to lose principal, riders and features can be added to annuity contracts—usually for an extra cost.

This allows them to function as hybrid fixed-variable annuities. Contract owners can benefit from upside portfolio potential while enjoying the protection of a guaranteed lifetime minimum withdrawal benefit if the portfolio drops in value.