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Annuities play an important role in retirement planning by helping individuals guard against outliving their assets. In the most general sense, an annuity is an agreement for an entity (generally a life insurance company) to pay another entity a series of payments. While there are many types of annuities, key features can include tax savings, protection from creditors, investment options, lifetime income and benefits to heirs.
Among the most common annuities are fixed and variable. Fixed annuities guarantee the principal and a minimum rate of interest. Generally, interest credited and payments made from a fixed annuity are based on rates declared by the company, which can change only yearly. In contrast, variable annuity account values and payments are based on the performance of a separate investment portfolio, thus their value may fluctuate daily.
There is a variety of fixed annuities and variable annuities. One type of fixed annuity, the equity indexed annuity, contains features of fixed and variable annuities. It provides a base return, just as other fixed annuities do, but its value is also based on the performance of a specified stock index. The return can go higher if the index rises. The 2010 Dodd-Frank Act included language keeping equity indexed annuities under state insurance regulation. Variable annuities are subject to both state insurance regulation and federal securities regulation. Fixed annuities are not considered securities and are only subject to state insurance regulation.
Annuities can be deferred or immediate. Deferred annuities generally accumulate assets over a long period of time, with withdrawals taken as a single sum or as an income payment beginning at retirement. Immediate annuities allow purchasers to convert a lump sum payment into a stream of income that begins right away. Annuities can be written on an individual or group basis.
Annuities can be used to fund structured settlements, arrangements in which an injury victim in a lawsuit receives compensation in a number of tax-free payments over time, rather than as a lump sum.
Measured by premiums written, annuities are the largest life/health product line, followed by life insurance and health insurance (also referred to in the industry as accident and health). Life insurance policies can be sold on an individual, or "ordinary," basis or to groups such as employees and associations. Accident and health insurance includes medical expense, disability income and long-term care. Other lines include credit life, which pays the balance of a loan if the borrower dies or becomes disabled, and industrial life, small policies whose premiums are generally collected by an agent on a weekly basis.
Source: U.S. Individual Annuities, 2019 Year in Review, LIMRA, 2020.
($ billions, end of year)
Source: U.S. Individual Annuities, 4th Quarter 2019, LIMRA, 2020.
($ billions)
(1) Includes variable individual annuities sales which were less than $0.1 billion.
(2) Single premium contracts bought by property/casualty insurers to distribute awards in personal injury or wrongful death lawsuits over a period of time, rather than as lump sums.
Source: U.S. Individual Annuities, 2019 Year in Review, LIMRA, 2020.
($000)
|
(1) Based on U.S. total, includes territories.
Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.
($000)
|
(1) Includes individual and group annuities.
(2) Based on U.S. total, includes territories.
Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.