Back to Annuity Basics: What You Should Know for Retirement Planning

Annuities can offer benefits that may fit your retirement needs, but do you know how they work, are sold and are regulated? Below you will find the answers to these common questions and more.

graphic with books

Retirement planning can seem overwhelming when you are first starting out, but it doesn’t have to be. Understanding your long-term needs and what financial products might work best for you is a great place to begin. 

What are Annuities and How Do Annuities Work?

One option you might consider for income in retirement is an annuity. So, what is an annuity? An annuity is a contract between you and an insurance company designed to assist you in meeting your retirement income goals.1^The Securities and Exchange Commission “Fast Answers: Annuities”

How do annuities work? In exchange for either a single or recurring payment, which is called a premium, the insurance company promises to make a series of payments to you either immediately (an immediate annuity) or at some point in the future (a deferred annuity).

Variable, Fixed or Fixed Indexed?

There are three main types of annuities: variable, fixed and fixed indexed annuities (FIAs). The accumulation of interest helps differentiate between the three.

With a variable annuity, investment returns are earned based on the performance of the investments you choose to put your money in. These investment portfolios can include stocks, bonds and money markets.

However, the return earned by a variable annuity isn’t guaranteed and the value of the chosen investments can fluctuate. You can make money if the value goes up, but you could lose money if it goes down.

With a traditional fixed annuity, interest accumulates based on a fixed interest rate, which is guaranteed for a set period of time and cannot decrease during that time period. That fixed interest rate is determined at the beginning of the contract.

With FIAs, there is an accumulation of interest based on the performance of an external index, such as the S&P 500® Index. FIAs can offer growth potential, including principal protection from index volatility. This is beneficial because interest can never be lost once it is credited to the annuity contract. 

FIAs can offer additional benefits, including tax deferral and guaranteed lifetime income.

Annuities are a Mainstream Retirement Opportunity

A retirement readiness study by the Index Annuity Leadership Council (IALC) found 78 percent of workers are looking for a source of lifetime income.2^American Equity "Annuities 101: Annuity Basics for Retirement Planning" 2018As there becomes a larger demand for guaranteed lifetime income, more retirees are looking to annuities as a retirement income product.

Another study by the IALC found Americans are concerned about running out of money during retirement, and are almost equally worried that while they are alive, they won’t have the funds to enjoy retirement and cover basic necessities.3^Indexed Annuity Leadership Council “The State of America’s Workforce: The Reality of Retirement Readiness” 2018 

While addressing that concern, fixed and fixed index annuities have started to become part of planning a balanced retirement portfolio, as more retirees look for benefits like lifetime income.

Fixed Indexed Annuities are Insurance Products Sold by Insurance Agents

Annuities are sold by licensed insurance agents who work with clients to provide information about retirement products and options. Some agents are dedicated to selling a product from a specific company, while other agents are considered independent and can sell products from different insurance carriers.4^Indexed Annuity Leadership Council “Americans’ Top Three Retirement Fears” 2018

Annuities are Regulated by State Departments of Insurance

Fixed and fixed index annuities are considered insurance products and are primarily regulated by state departments of insurance. Every state has an insurance commissioner who regulates and supervises the insurance and annuity products sold within their state.5^Financial Industry Regulatory Authority “Products and Professionals”Annuity contracts must be filed with and approved by each state where the contracts are sold. Similarly, agents needs to be licensed in all of the states they operate in.6^Insured Retirement Institute “State Regulation of Annuities”An agent selling variable annuities has to be registered with FINRA.

Your state department of insurance likely provides information about insurance carriers, insurance licensed producers and may provide information about annuity products, as well.7^National Association of Insurance Commissioners “States and Jurisdictions”

Talk to a licensed agent to find out more about annuities and how they may help you reach your retirement income goals.


The content is provided for informational purposes only and does not constitute advice. For specific details on how this may apply to your personal situation, contact your personal financial advisor or insurance agent for more details. American Equity contracts are only sold through independent agents. Please contact your state insurance department to see if there is an independent insurance agent in your area appointed to sell American Equity annuity contracts.

American Equity Investment Life Insurance Company® does not offer legal, investment, or tax advice. Please consult a qualified professional.

Guarantees are based on the financial strength and claims paying ability of American Equity and are not guaranteed by any bank or insured by the FDIC.

Possible interest credits for money allocated to an index-linked crediting strategy are based upon performance of the specific index; however, fixed index annuities are not an investment, but an insurance product, and do not directly invest in the stock market or the index itself.