What is an annuitant?

An annuitant is a person who regularly receives money payments from an annuity. An annuity is a type of investment that gives fixed costs over time. Annuities are often used to provide income during retirement.

The payments an annuitant receives are called distributions. They may be monthly, quarterly, or yearly and can last for a set number of years or the rest of the annuitant’s life. The total payment depends on the initial amount invested and the annuitant’s age and life expectancy.

How annuities work

To get an annuity, a person pays a lump sum or a series of payments to an insurance company. This upfront cost is called the premium. Later, the insurance company pays that money back to the annuitant on a fixed schedule. Some annuities start paying immediately (immediate annuities), while others begin payments later, like retirement age (deferred annuities).

Annuities can be structured in different ways:

• Fixed annuities provide a guaranteed, set payment amount for each distribution period. The annuitant knows precisely how much they will receive.
• Variable annuities tie payments to an investment account’s performance. Payouts vary based on the account’s profits and losses.
• Indexed annuities combine features of fixed and variable types. Payouts are based on a market index but have a guaranteed minimum.

Annuities are a form of insurance and an investment. They help protect people against outliving their assets and guarantee they will not run out of income. However, the safety and predictability come at a cost. Annuities often have high fees and commissions that eat into the returns.

Reasons people buy annuities

People mainly buy annuities to create an income stream during retirement. Social Security payments often aren’t enough on their own. And company pensions have become less common. An annuity acts like a personal pension plan. It ensures the annuitant receives a steady monthly check no matter how long they live.

Some specific reasons include:

Guaranteed lifetime income

Many retirees like that an annuity keeps paying until they die. They don’t have to worry about running out of money even if they live long lives. A lifetime annuity shifts the risk of the annuitant living longer than expected to the insurance company.

Tax deferral

Money in an annuity grows tax-free until the annuitant withdraws it. Deferring taxes allows the investment to compound faster over time. However, annuitants pay regular income tax once they retire and start receiving payouts. However, they may be in a lower tax bracket when they retire than when working.

Investment gains with downside protection

Variable and indexed annuities allow the annuitant to participate in the stock market’s gains during good times while limiting losses in imperfect markets—this balance of risk and reward appeals to more conservative investors approaching retirement age.

Providing for heirs

Annuitants can add a death benefit provision to their contract so that their heirs receive a payout. Beneficiaries typically receive at least the amount of the initial investment premium minus any distributions the annuitant collected. Some contracts allow for extra amounts to go to heirs.

Types of annuitants

There are a few main categories of annuitants:

Retirees

Most annuitants are seniors. They use annuities to convert their retirement nest egg into stable lifetime income. An annuity offers peace of mind and makes budgeting easier. Retiree annuitants are typically 60 and above.

Pre-retirees

Some people in their 40s and 50s use deferred annuities to boost their retirement savings. Pre-retiree annuitants may choose an annuity for the tax benefits and hands-off approach compared to managing their investments. Deferred annuities offer guaranteed growth without the risk of losing money in the stock market.

Beneficiaries

Beneficiary annuitants inherit or receive an annuity after the original owner dies. Spouses, children, and other loved ones can be named as beneficiaries. The annuity contract terms depend on how much and long they receive payouts. Beneficiaries have options like continuing the annuity payments or cashing out the annuity’s remaining value in a lump sum.

Annuitants in retirement planning

For many annuitants, payments from their annuity provide an essential part of their retirement income. Along with Social Security, pensions, and withdrawals from retirement accounts like 401(k)s and IRAs, an annuity helps them cover monthly expenses.

But annuities also have tradeoffs to consider in a financial plan:

• Annuitants lose access to their money. Most annuities restrict additional withdrawals beyond the scheduled payments. There are usually high surrender fees to cash out early.
• Payments are rarely adjusted for inflation. Fixed annuities lose buying power over time, and adding an inflation rider costs more.
• Some annuitants regret tying up a large portion of their savings and wish they could invest it differently or use it for other needs.
• Heirs often get little to nothing unless the annuitant pays extra for a death benefit.

Annuitants should work with a retirement planner to make sure an annuity makes sense in their situation. For some, the reliable income and low risk are worth the inflexibility and opportunity cost. But others are better off creating income from a balanced portfolio of stocks and bonds that they can adjust as needed.

Annuities become more valuable the longer an annuitant lives. Those with good health and longevity in their family may benefit most. But an annuitant in poor health who dies soon after starting payments will not get their money’s worth. Annuities require making an educated guess about lifespan.

Regulation of annuity providers

Companies that offer consumer annuities are heavily regulated at the state and federal levels. Since annuities are insurance products, each state’s insurance department oversees annuity issuers. Annuity contracts must be approved and meet specific consumer protection standards.

The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) also regulate variable annuities as securities since they are tied to investment products. Brokers and agents selling annuities must follow strict suitability and disclosure rules or face disciplinary action. A percentage of an investor’s assets can go into an annuity based on age and risk tolerance.

These safeguards prevent annuitants from being taken advantage of or sold inappropriate products. Seniors, especially, can be vulnerable to annuity fraud and high-pressure sales tactics. Regulators watch for unethical practices like unnecessarily replacing one annuity with another just to generate a commission.