Is the Principal Guaranteed in an Annuity?

by Alibaster Smith ; Updated July 27, 2017

If you invest in an annuity and your investment principal is lost, you could face a serious financial hardship at retirement. To prevent this from happening, you should familiarize yourself with annuities that guarantee your investment principal. Know how these annuities work, and consider them for at least part of your retirement savings.

Types

There are two types of annuities that provide guarantees on investment principal. A fixed annuity, by its nature, provides a guarantee of investment principal. A variable annuity, in some instances, may provide a guarantee of investment principal, even though this is not a standard feature for a variable annuity contract.

Significance

By protecting your investment principal, you are assured that you can never lose more than what you put into the contract. This is important since it means that you never have to start over when saving money for retirement. While you may end up losing a significant portion of your investment earnings, or even all of them, you won't be left with nothing.

Features

The way that a fixed annuity guarantees your investment principal is by investing in bonds and other income producing assets. These assets pay a fixed rate of return and the insurance company can guarantee you a set rate of return on the money in your annuity. Because of this, they also guarantee your investment principal. A variable annuity is able to guarantee your investment principal if it offers a guaranteed accumulation feature. These features are riders on the policy that modify the original contract. The guaranteed accumulation rider guarantees a minimum level of accumulation in the policy, thus guaranteeing the principal of your policy, regardless of how the investments in the policy actually perform.

Consideration

You should consider investing a portion of your retirement benefits into an annuity that guarantees your investment principal. This gives you a "safety net" so that you aren't risking all of your retirement savings in investments that are not guaranteed to return anything to you. By investing a portion of your savings into annuities that guarantee your investment principal, you also gain the inherent benefits of an annuity policy, which include tax deferred investment growth on the money inside the policy and the option to convert your annuity to an income that will last for as long as you live.

References

  • "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
  • "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
  • "Life & Health Insurance, License Exam Manual, 6th Edition"; Dearborn Financial; 2004

About the Author

I am a Registered Financial Consultant with 6 years experience in the financial services industry. I am trained in the financial planning process, with an emphasis in life insurance and annuity contracts. I have written for Demand Studios since 2009.