If you ask retirees who receive income from an annuity why they purchased the product, many would point to the peace of mind that comes with receiving a retirement paycheck for the rest of their lives. Annuities, like pensions, provide financial security in the form of guaranteed income payments for life, offering retirees an assurance that they will not outlive their savings. It’s a comfort that many would like to have, according to an Employee Benefits Research Institute survey. Eighty-three percent of respondents were interested in using some of their retirement savings to purchase products that deliver guaranteed income.1
A persistent misconception about annuities discourages usage.
There is a common misconception about annuities, though, that prevents some from even considering the products for income in retirement. Many people believe that purchasing any type of annuity requires you to hand over your money irrevocably to an insurance company in return for income payments. This is called “annuitization,” and it’s not surprising people are uncomfortable with the idea of no longer being able to access the money paid into the annuity except through regular income payments over time.
While annuitization can be the right decision for some, it’s not right for all. In fact, most people who own an annuity don’t annuitize. According to research by LIMRA, only about 5% of annuities sold in the U.S. are annuitized.2
Modern annuities offer many options to generate income.
There are many types of annuities on the market today with more choices than ever to customize a solution to meet your needs and preferences. But before looking at more flexible alternatives to annuitization, let’s look at when it might make sense to annuitize.
Need income immediately? Annuitization can make sense.
If you want guaranteed lifetime income and need the payments to begin immediately (within a year or less), then a single premium immediate annuity (SPIA) may be a good choice. SPIAs are straightforward products – you pay a lump sum to the insurance company to receive income payments for a specific period or the rest of your life, or the life of you and your surviving spouse. Because you want to turn on income quickly, without an “accumulation” period when the assets can grow before income payments begin, you are required to annuitize. This means you can’t change your mind and get your money back or make withdrawals from the account value (the money you put into the annuity.) Your money is inaccessible to you except through income payments per the contract.
Income riders can provide flexibility and access to your annuity assets
For every other type of annuity — while annuitization is an option — it is more common for income to be generated through “riders”. Riders are optional add-ons to annuity contracts that deliver a benefit for an additional cost. People often choose a rider to turn their annuity assets into income because it provides greater flexibility and access to the account assets than annuitization. When income is generated using a guaranteed lifetime income or withdrawal benefit rider, the account value (your premium payment plus interest) remains available until it is depleted through income distributions. Even when the account value hits zero, income payments will continue for life or the period you specified in the contract.
So, if you don’t need to start receiving income right away, a deferred annuity with an income rider may be a good choice. A deferred annuity like a fixed index annuity (FIA) offers protection of your principal and tax-deferred growth until you are ready to begin taking income. And, using a lifetime income benefit rider provides flexibility and access to the assets depending on your preferences. For example, if you die unexpectedly, the value of assets remaining in the contract can be passed on to your designated beneficiaries. And, guaranteed lifetime income benefit riders typically offer attractive payout rates relative to annuitization.
Annuities, like pensions, are powerful income-generating tools.
Modern annuities are powerful tools that can provide guaranteed lifetime income. In some cases, using annuitization to convert annuity assets into regular guaranteed income payments may be the best option, particularly if income is needed right away. But for most annuity owners, lifetime income riders provide both the peace of mind of guaranteed income payments and enable access to the account value, depending on how the contract is set up.
Learn more about how to generate guaranteed income.
When considering annuity options, remember that commission-free annuities offer lower costs and improved benefits. If you would like to learn more about guaranteed lifetime income options, contact a DPL Consultant at 1-877-625-5544 or use DPL's Product Discovery Tools to evaluate annuities, explore guaranteed income options, and compare income strategies.
1 "Results From the 2024 Retirement Confidence Survey Find Workers’ and Retirees’ Confidence Has Not Recovered From the Significant Drop Seen in 2023, but Majorities Remain Optimistic About Retirement Prospects" Employee Benefit Research Institute.
2 “What is Annuitization” Annuity.org.
Different annuity products have various features that may include market risks, potential tax implications, and fees and costs. All products may not be suitable for your needs and each product's features should be discussed with a licensed insurance professional.
All guarantees are based on the financial strength and claims-paying ability of the issuing insurance company.