The best annuities for seniors depend on how the senior intends to use the annuity. Some people don't want extra income and simply want a tax-deferred method of saving. Others want an immediate income. Factors such as age and the underlying contract specifics also make a difference on the best type of annuity for seniors.
Types of Annuities
Annuities are either immediate or deferred. You take a periodic payment immediately with an immediate annuity and allow the money to grow tax-deferred with a deferred annuity. Within the category of immediate annuities, you have either fixed annuities or variable annuities. Fixed annuities offer a specified interest rate similar to a CD. Variable annuities have sub-accounts similar to mutual funds, and the policy owner selects sub-accounts and the percentage of the money to invest in each. Deferred annuities include one other type of annuity, the indexed annuity. Indexed annuities offer a guaranteed minimum return but if the index selected, such as the S&P 500, produces a greater return, the investor receives the higher return or a percentage of that return.
If you want an immediate payment, then you still must choose between the fixed and variable return. For those who need the highest potential payment, fixed annuities offer that option. Variable annuity payments often start out lower but if the company makes more than the assumed interest rate (AIR), the payment increases the following year. This offers the annuitant the option of maintaining his spending power if inflation occurs.
Some people simply want a tax-deferred investment but don't need an immediate income. Deferred annuities offer the potential for that option. When investing in a deferred annuity, you'll receive simply the interest stated in the contract for a fixed annuity.
While there is normally a guaranteed rate of return for a specified period, once that period expires, the interest may lower to the minimum guaranteed in the contract. Both the initial guaranteed rate and the minimums are important. The length of the guaranteed rate is also important when looking for the best annuity. Variable annuities may offer living benefits for an additional cost. These too can guarantee the rate of return if you follow specific rules such as leaving the funds in the policy for a set period. Look for the policy with the highest guarantees and the most liberal rules. The minimum rate on indexed annuities is important but also the participation rate in the index and the cap play an important role. The participation rate is the percentage of the index growth you receive, and the cap is the maximum percentage the company allows.
The surrender period on an annuity is the length of time you must leave the money or face a penalty. The penalty is a percentage of the contract funds. Choose contracts with lower surrender percentages and length of time. Look for money you can take out annually without a penalty called "free out" money. The most liberal wording is 10 percent per year cumulative. That means if you don't use 10 percent this year, next year you will have 20 percent available.
If you only want the annuity to pass the funds to a beneficiary at your death, use either a fixed annuity for the guarantees or a variable annuity with a guaranteed death benefit. The guaranteed death benefit varies according to the wording of the riders. Some offer a specified percentage of growth, while others simply guarantee the amount you invested. These benefits cost extra.