Have you purchased annuities before? Then this ADVANCED section is dedicated to you. Please click on the question below to view the answers to the Frequently Asked Questions (FAQ). For more information, click the button below and complete the form to receive your free report from Annuity Alliance.

Advanced Guide to Annuities

Learning more about annuities can help you understand what options are available to you. Below are the answers to questions that many consumers, similar to yourself, have asked our licensed annuity experts.

It depends on which type of annuity you have. If you choose a fixed-rate annuity then you’re not responsible for choosing the investments, the insurance company is and agrees to pay you a pre-determined fixed return.

When you opt for a variable annuity, however, you decide how to invest your money in the sub-accounts (essentially mutual funds) offered within the annuity. The value of your account depends on the performance of the funds you choose. While a variable annuity has the benefit of tax-deferred growth, its annual expenses are likely to be much higher than the expenses on regular mutual funds so ordinary funds may be a better option. Please check with a financial professional and if you would like to talk to an Annuity Alliance professional to get free, expert advice on your unique situation please contact us to speak to a licensed Annuity Alliance specialist.

While insurance companies may have different longevity experience within their pool of annuitants, they all make assumptions that the individuals electing to purchase an annuity are in good health. Therefore, if you’re in poor health or believe that you have a shorter life expectancy for genetic reasons, a life annuity may be the wrong purchase for you. If you want the peace of mind coming from guaranteed retirement income then you can select a fixed period annuity for 5, 10, or 20 years.

If you and your spouse are considering a joint and survivor annuity and one of you is in poor health, you may want to consider combining a life annuity on the healthy spouse and a certain (fixed period) annuity on the one in poor health.

If you’d like to discuss this further please contact us to speak to a licensed Annuity Alliance specialist.

Read all the sales documents yourself and make sure you are aware of every potential fee. Listen to your salesperson’s explanation however, do not rely on it alone.

Be cautious if anyone suggests you exchange your existing annuity for a new annuity. Annuity exchanges are known as 1035 exchanges after the section of the IRS code that regulates them. A salesperson may tell you a 1035 swap is a great deal because it allows you to get the features of a new annuity without incurring any taxes.

But by moving into a new annuity you will likely start a new surrender period. For example, say you have owned an annuity for 10 years; you probably could close out your account without paying a surrender charge. But if you swap that annuity for a new one you will now have a new surrender charge period that can last 10 years or so.

Most 401(k) plans offer a series of annuity options but little help in assisting you to make the right decision. They do require that if you elect an annuity option you elect out of a joint and survivor annuity. Under this annuity the annuity payments will continue to your spouse; either at the same amount or another amount, you select.

When considering an annuity option offered through your employer you should also shop the commercial annuity market. There may be better rates and different options to choose from.

Maybe, since one of the main advantages of an annuity is that your money grows tax-deferred. However, under current tax rules, you will need to begin income by April 1st of the year following the year you turn age 70 & ½. If you’re retired or very close to retiring and you feel you need more guaranteed income than social security will provide, it can make sense to use a portion of your 401(k) or IRA money to buy an immediate annuity that will pay income for life. Also, if you are looking for the safety and predictability that you’ll find in a fixed annuity it makes sense as well.

Your annuity beneficiaries will owe income tax on the gains that you deferred during your lifetime. This can be an advantage to them if they are taxed at a lower rate than you.

An annuity may be subject to estate taxes as well. An estate planning attorney can help you determine if estate taxes should factor into your decision to purchase an annuity.

Once an annuity is annuitized (you start taking regular income payments), there are no other options. The income is distributed as the contract requires, but there is no flexibility to increase or decrease the payments or to make cash withdrawals from the principal.

No. An income rider is an attached benefit that you can add to some deferred annuity policies that solve for a specific need like income, legacy, or confinement care. Income riders have to be chosen at the time of the application and cannot be added to the policy after the annuity has been issued.

Most income riders and death benefit riders offer a guaranteed annual growth amount that can be used only for a specific need. For example, an income rider might offer a contractual growth amount of 6% compounded annually for as long as you defer or for a specific period of time. That 6% compound growth amount can only be used for income and the high percentage stops accumulating as soon as you turn on the lifetime income stream. You can’t transfer the amount or peel off the 6% compound interest like you could with a CD, but you can use that amount for income.

Riders are typically separate calculations within the annuity contract used to determine payment levels.

For example, if an income rider is attached to a deferred annuity, your policy statement will show the accumulation (investment) value, surrender value, and the rider value. All three calculations are different.

There is generally a cost for annuity policy riders.

Some annuities provide income payments that increase each year by changes in the cost of living, usually subject to a maximum in any given year. For the equivalent premium and type of annuity, you start receiving lower payments. It will take a number of years for these increasing payments to begin to exceed the level payments you would have otherwise received from an annuity offering no such cost of living increases.

There are also annuities that increase the income payments by a fixed percentage, such as 2% each year.

If you’d like to discuss this further please contact us to speak to a licensed Annuity Alliance specialist.

Yes, if the annuity is still in the accumulation phase. The IRS allows a few different ways for you to transfer your money from one annuity to another without paying taxes. Remember, that although the IRS allows tax-free transfers, your current company may charge surrender fees. You should always check your contract before transferring from one annuity to another.

SPDAs are designed to accumulate your savings on a tax-deferred basis. These contracts can be converted into a stream of guaranteed income whenever you choose to do so.

Insurance and tax laws do not require that you make an exchange with the insurance company that issued your SPDA; therefore, you can and should get competitive quotes from other insurance companies offering retirement income. (No such thing as a RIA…just annuities that can provide retirement income)

Several benefits of exchanging your SPDA to income are:

  1. Obtaining a secure lifetime income
  2. Excluding a portion of each payment from tax
  3. Locking in long term interest rates

Exchanging an existing SPDA may also impact other factors such as liquidity so exchanges should be done with considerable thought.

If you’d like to discuss this further please contact us to speak to a licensed Annuity Alliance specialist.

Taxes may apply to your beneficiary (the person you designate to take further payments) or your heirs (your estate or those who take through the estate if you didn’t designate a beneficiary).

Income tax: Annuity payments collected by your beneficiaries or heirs may be subject to tax on the same principles that would apply to payments collected by you.

Exception: There’s no 10 percent penalty on withdrawal under age 59-1/2 regardless of the recipient’s age, or your age at death.

Estate tax: The present value at your death of the remaining annuity payments is an asset of your estate and subject to estate tax with other estate assets. Annuities passing to your surviving spouse or to charity would escape this tax.

Tax tables are set into law by the United States Congress and administered by the IRS. Each year, the new tables are posted on the IRS website in IRS Publication 151 and Notice 1036. Insurance companies who hold your annuity can update your Federal income tax withholding based on the new monthly periodic tax tables and formulas. They withhold the required federal taxes according to your marital status and exemptions (dependents) elected. You can change your tax withholding amount at any time. It is a good idea to check the amount of your Federal and State tax withholding each year.

Distribution options will vary depending on whether or not you are the surviving spouse or someone other than the surviving spouse. If you are the surviving spouse then you have several options but the most common action is to treat the annuity as your own, keeping all the options the owner had intact.

As someone other than the surviving spouse, you’ll basically have three potential options:

  1. Lump-sum payout
  2. Full payout over the next five years
  3. Elect within 60 days to annuitize over your own lifetime

If the annuity payments have already begun then you must take the payments at least as rapidly as the original owner was taking them.

When a person inherits an annuity the gains stay with the policy. Depending on the type of annuity, taxes will have to be paid on the lump sum received or on the regular fixed payments. The payments received from an annuity are treated as ordinary income which could have as high as 35% tax depending on your tax bracket.

Supposing that this annuity was purchased with after-tax dollars, ordinary income is owed on all gains, but not on the principal. A portion of each annuity payment will be considered a tax-free return of principal, spreading the tax liability out over time, unless you select the lump-sum payout.

The future value of an annuity is simply the future value of all your contributions based on the fixed rate of interest your investment accrues each year. If you know how much you plan to invest each year and the fixed rate of return your annuity guarantees, you can easily determine the value of your account at any point in the future.

The formula for the future value of an annuity assumes an ordinary annuity, meaning payments are made at the end of each period and all your payments are of equal value.

FV = P * {(((1+R)^N) – 1) / R}

In which P is the payment amount, R is the rate of interest and N is the number of periods.

The Time Value of Money

The future value calculation is based on the concept of the time value of money. This simply means a dollar earned today is worth more than a dollar earned tomorrow because funds you control now can be invested and earn interest over time. Therefore, the future value of an annuity is greater than the sum of all your investments because those contributions have been earning interest over time. For example, the future value of $1,000 invested today at 10% interest is $1,100 one year from now. A single dollar today is worth $1.10 in a year because of the time value of money.


Assume you make annual payments of $5,000 to your annuity for 15 years. You have an ordinary annuity that earns 9% interest compounded annually:

FV = $5,000 * {(((1 + 0.09)^15) – 1) / 0.09}

= $5,000 * {((1.09^15) – 1) / 0.09}

= $5,000 * 2.642 / 0.09

= $5,000 * $146,804.58

Without the power of interest compounding, your series of $5,000 contributions is only worth $75,000 at the end of 15 years. Instead, with compounded interest, the future value of your annuity is almost twice that at $146,804.58.

Annuity Due

Unlike an ordinary annuity, an annuity due makes payments at the beginning of each period. To calculate the future value of an annuity due, simply multiply the ordinary future value by 1+R.

In the above example, the future value of an annuity due with the same parameters is simply $146,804.58 * (1+0.09), or $160,016.99.

Annuity Alliance has access to trained and qualified agents across the United States who can educate you on the different types of annuity products and services to help you achieve your long-term retirement planning and income needs. To learn more about annuities, get rates, or inquire about purchasing one, please contact Annuity Alliance for a free, no-obligation consultation.