Should senior citizens purchase an annuity? It really on the individual goals of the senior citizen. For some, an annuity can be an appropriate part of an overall financial plan. For others, an annuity can be totally unsuitable. Annuities can be confusing. So get the facts, do your homework and get your answers before you invest. You need to know the details of any annuity being offered to you because the specifics vary from annuity to annuity and company to company.

Parties to an Annuity Contract 

When you invest in an annuity, you enter a contract with an insurance company under which, in return for your investment, the insurer promises you (and/or your heirs) a stream of payments starting now or in the future. 

Fixed Annuity vs. Variable Annuity 

The focus is on the underlying investments. Fixed annuities are invested primarily in bonds, bond funds or the insurer’s general account. Variable annuities are invested primarily in stocks, stock funds or stock index funds. 

Immediate vs. Deferred Annuities 

The focus is on when payouts begin. With an immediate annuity, the insurer agrees to start making payments soon after the contract is signed. With a deferred annuity, payments by the insurer are postponed until a later time. 

The Underlying Investment 

An annuity is an investment product that has an insurance policy packaged with it. The investment portion allows you to spread your money among one or more funds (called sub-accounts); or, in the case of a fixed annuity, your money may be invested by the insurer through its general account. 

Payout Options 

Many different payout options are offered by insurers. Common structures provide for payments either for (1) the rest of your life, or (2) as long as you or your spouse is alive, or (3) a set period (such as 10 years). The annuity payments are usually monthly. 

Advantages 

The chief benefit of a deferred annuity is its tax-deferral. Funds left in the annuity are not taxed until they are withdrawn. When withdrawn, they will be taxed at ordinary tax rates. The chief benefit of an immediate annuity is locking in a monthly income stream. 

Drawbacks 

Among the disadvantages of deferred annuities can be high expenses (almost 1% more a year than mutual funds), high surrender charges during the initial years of a contract, and the tax burden they can impose on heirs. With fixed annuities (deferred or immediate) inflation can eat away at the value of the locked-in fixed payments.