Choosing Annuities for Large Sums of Money

Keep your goal in mind when comparing annuities.

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Managing a steady stream of income is often less daunting than managing a large amount of money. Annuities allow you to convert a lump sum into periodic payments. Some annuities carry guarantees on your principal and your payments. Companies offer different features on their annuities. The features that matter the most to you will be determined by what you want to use the annuity for.

Types of Annuity

Annuities come in three varieties. Fixed annuities offer guaranteed returns, but at relatively low rates. Variable annuities provide market exposure, which brings the chance of high returns -- and the risk of your principal going down. Equity-indexed annuities fall between the other two, giving you the ability to earn market-based returns without risking a decrease in value. Security-minded investors tend toward fixed annuities, while more risk-tolerant investors might prefer equity-indexed or variable annuities.

Company Credit Rating

When you take out an annuity, you put your money in the hands of an insurance company. Even if the annuity carries guarantees that your principal will never decrease and that you’ll consistently have positive returns, that promise is only as good as the insurance company’s ability to pay. Rating agencies, such as Standard & Poor’s and Moody’s Investors Service, issue a letter rating that indicates an insurance company’s ability to pay. Choosing an annuity from a top-rated insurance company means less risk that the company could go bankrupt and you'd lose your money.

Settlement Rates

If you’re looking to convert a large amount of cash into a steady stream of income now or in the near future, you should consider the settlement rates each annuity offers. Each company builds its own rates table, which provides an amount per thousand based on your age and gender. Compare rates for the same payout duration and frequency. For example, $8 per thousand is better than $7 per thousand, so long as they’re both annual payments for the duration of your life. If the $7 per thousand is monthly instead of annually, it would pay more over the duration of your life.

Fees and Charges

Compare the fees that each annuity would charge. Some might levy no fees except early-withdrawal penalties. Others include annual fees that could erode your returns and principal. You should know which fees, if any, apply to an annuity so that you can compare potential growth after subtracting fees. Early-withdrawal penalties -- sometimes called surrender charges -- can vary widely between companies as well. If you’re not immediately converting your annuity into an income stream, make sure the withdrawal terms allow the access you expect.