It’s an Insurance Thing: A Fresh (or First) Look at Annuities

Redesigned annuities are less expensive and easier to understand and buy, yet still customizable. They can be a vital hedge against outliving your assets. Renaissance
6 min read
Photo by

Where insurance meets investing, there can be a few potholes. New products soothe the sting of costs and offer customization. That means annuities deserve a fresh look.

If you’ve heard of annuities, you fall into one of three categories: you love them, you hate them, or you don’t have the slightest clue as to what the darn things actually do.

Wherever you fall, annuities deserve a thoughtful exploration. Like any financial tool, annuities have their use, especially for investors left rattled by the last few years of volatile stock markets and economic upheavals. They’re not necessarily a silver bullet for every problem, or for every investor. Yet, increasingly, they may have earned a spot in your portfolio, which simply means asking yourself some key questions about financial comfort.

“Most investment products are all about maximizing return, but annuities are doing something different, which is acting as a hedge against market volatility and longevity risk,” says Matt Sadowsky, Director of Annuities at TD Ameritrade. “The primary reason we offer annuities is to help clients hedge the risk of outliving their assets. And once investors remove fear from part of the equation, they are better positioned to make smarter, less emotional decisions with the rest of their portfolio.”

For example, rather than systematically withdrawing from a portfolio at a 4% rate but living in fear of running out of money one day, with an annuity, you can lock in a distribution rate at a potentially higher level and you never have to worry about depleting your portfolio.

What Are They?

Annuities are insurance contracts. You put up a certain amount of money, either all at once or over time, and an insurance company agrees to pay you a minimum amount, or rate of return, for a set period of time. The amount you get paid can be fixed, or can vary, and the term of the annuity can range from a fixed number of years, until long after you die. However, some annuities can be inflexible and expensive or they can be just the thing to level out hot-and-cold investment returns, and keep a minimum amount of cash coming in during your golden years.

Remember this: when you invest in stocks, bonds, and mutual funds, you’re focused on accumulating a nest egg. When you buy an annuity, focus shifts from building up a pile of cash to establishing a foundation of security and certainty, often in the form of a guaranteed payout. Annuities give an individual the opportunity to create their own income stream personal pension plan—so he or she doesn’t have to worry as much about making the nest egg last.

Annuities are typically thought of as: immediate or deferred, fixed or variable. Immediate and deferred refer to when you get your money. Fixed and variable refer to the payout—either a set payment or rate of return, or one that is based on underlying investment performance. Of course, fixed annuities can be immediate or deferred. Same for variables, although they are usually deferred.

Buyers can also add a combination of other optional benefits—ranging from an insurance payout, to a guaranteed return of principal, called a rider. These benefits let you customize an annuity. Of course, each rider can push up the cost.

The Nuts And Bolts

The simplest annuity is perhaps the fixed immediate variety. You fork over a lump sum, and receive a stream of guaranteed payments—either for a number of years, the rest of your life, the rest of your life and your spouse’s life, or a set number of years after you’re gone. The longer the guaranteed period, the lower the payment.

With a variable annuity, the investor either pays a lump sum up front or can continue to add funds, but his money goes into investments, which are held in sub-accounts and act similar to mutual funds. The contributions can grow tax-deferred until you start taking withdrawals, making them similar to a 401(k) or Individual Retirement Account. This allows the investor to enjoy some gains if the investments do well, but also lowers the payout if the sub-accounts lose value. For an extra cost, variable annuities can come with a guaranteed minimum income rider.

Shaking That Rep

The drawback to annuities? Historically, cost, and the fact that your money is more or less locked up. Commissions and annual fees tend to make annuities more expensive than many mutual funds and exchange-traded funds, which is the price you pay for tax deferral and potential guaranteed income or returns. Taking money out of an annuity means you could be hit with “surrender fees” for the first several years. And unless you buy a death or survivor benefit rider, once you die, you can’t necessarily pass on the annuity to heirs.

Taxes also can be an issue. Some income from annuities can be taxed as regular income. You’d potentially pay a lower rate on capital gains or dividends, from a taxable investment account (assuming lower tax rates on gains and dividends remains in effect; consult a tax professional for clarity on current law). The tax treatment of an annuity can also become a burden for heirs.

Annuities certainly have faced their share of negative coverage over the years. For instance, the relatively high costs and lock-up and surrender periods on variable annuities have been criticized compared to mutual funds or other options. And, with a fixed annuity, you also face the risk that inflation will erode the value of your payments over time.

“Not all annuities are created equal. Not all annuities have benefited from cost reductions, not all are introducing new features, and it’s not always true that low cost means good value. So it’s important to sift through and find the best potential products,” Sadowsky says. “TD Ameritrade has done that. We’ve been highly selective in determining which carriers and products are invited onto our annuity platform. We focus on carriers with demonstrable financial strength and require a minimum S&P credit rating of AA- or better. And we require the variable annuities on our platforms to have no surrender charge and be low cost.”

Financial planners generally advise that no more than 30% of assets should go into annuities. Given the plethora of options and the wide range of fees on annuities—as well as the pros and cons of locking up your cash for years to come—it’s best to educate yourself about specific products.

Good Fit?

Find out if an annuity makes sense for you, or if you could save money by switching to TD Ameritrade.

Call 800-417-7423 to chat with an Annuity Specialist

Investors should carefully consider a variable annuity’s risks, charges, limitations, and expenses, as well as the risks, charges, expenses, and investment objectives of the underlying investment options. This and other important information is provided in the product and underlying fund prospectuses. To obtain copies of the prospectuses, contact an annuity specialist at 800-347-7496 or email Please read them carefully before investing.

The information presented is for informational and educational purposes only. Content presented is not an investment recommendation or advice and should not be relied upon in making the decision to buy or sell a security or pursue a particular investment strategy.

Call Us

Annuities are long-term investments designed for retirement purposes. Withdrawals of taxable amounts are subject to income tax and, if taken prior to age 59½, a 10% federal tax penalty may apply. Early withdrawals may be subject to withdrawal charges. Optional riders are available at an additional cost. All guarantees are based on the claims paying ability of the insurer. An annuity is a tax-deferred investment. Holding an annuity in an IRA or other qualified account offers no additional tax benefit. Therefore, an annuity should be used to fund an IRA or qualified plan for annuity features other than tax deferral. Product features and availability vary by state. Restrictions and limitations may apply.

Investment Products: Not FDIC Insured * No Bank Guarantee * May Lose Value

Insurance products/services are offered through The Insurance Agency of TD Ameritrade, LLC. Brokerage services provided by TD Ameritrade, Inc., and TD Ameritrade Clearing, Inc. The Insurance Agency of TD Ameritrade, LLC and TD Ameritrade, Inc. are both wholly owned subsidiaries of TD Ameritrade Holding Corporation.

An insurer’s financial strength rating represents an opinion by the issuing agency regarding the ability of an insurance company to meet its financial obligations to its policyholders and contract holders. A rating is an opinion of the rating agency only, and not a statement of fact or recommendation to purchase, sell or hold any security, policy or contract. These ratings do not imply approval of our products and do not reflect any indication of their performance. For more information about a particular rating or rating agency, please visit the website of the relevant agency.

All guarantees are based on the claims paying ability of the insuring company.
The annuity products offered are issued by separate and unaffiliated third-party insurance carriers. TD Ameritrade and these companies are not responsible for each other’s policies or services.

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2019 TD Ameritrade.

Scroll to Top