QUIZ: Are Annuities Right For You?

As traditional sources of guaranteed retirement income -- such as pensions -- disappear, many retirees are wondering where to turn after suffering through a severe market downturn in the past decade. An annuity may be the answer, but not all annuities are alike, and some may not be appropriate for you. Take our ten-question quiz, brought to you by Kiplinger, to see how much you know about these products and whether you should invest in them. Write down your answers and scroll to the bottom for the answers and explanations! ‍

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Question 1

‍All annuity payouts begin immediately after purchase.

1. True
2. False

Question 2

‍One way to guarantee that you won’t outlive your money is to use a portion of your retirement savings to buy an immediate annuity.

1. True
2. False

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Question 3

‍Annuities are new financial products created in response to stock market volatility, disappearing pensions and Americans’ increased appetite for guaranteed income for life.

1. True
2. False

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Question 4

‍If a 65-year-old man were to invest $100,000 in an immediate annuity today, how much would he receive in annual payouts?

1. Less than 4% of his initial investment each year
2. Exactly 4% of his initial investment each year
3. More than 4% of his initial investment each year

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Question 5

‍Who would generally receive the larger annual payments from an immediate annuity purchased from an insurance company: A 65-year-old man or a 65-year-old woman?

1. The man
2. The woman

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Question 6

‍When it comes to buying an immediate annuity, age matters. At what age would you receive the highest annual payout based on the same initial investment

1. 65
2. 70
3. 75

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Question 7

‍Most immediate annuity payments increase with inflation.

1. True
2. False

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Question 8

‍In most cases, deferred annuities are liquid investments that allow you to cash out your contract and get ALL your money back at any time, regardless of your age.

1. True
2. False

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Question 9

‍Some deferred annuities can protect you from stock market losses.

1. True
2. False

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Question 10

‍What happens to the money you have invested in an annuity if the insurance company goes under?

1. You lose it all.
2. It's protected by the FDIC
3. Up to half of your investment is protected.
4. It depends on the type of annuity you buy.

------------------------------------------------------------------------------------------------------------------------------------ Correct Answers In BOLD

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Question 1

‍All annuity payouts begin immediately after purchase.

1. True
2. False

There are two types of annuities: immediate annuities and deferred annuities. Immediate annuities are best for retirees who want to receive payouts right away. Deferred annuities are better for people who are still saving for a future retirement. The money they invest grows tax-deferred until it is withdrawn later.

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‍Question 2

‍One way to guarantee that you won’t outlive your money is to use a portion of your retirement savings to buy an immediate annuity.

1. True
2. False

If you invest money in an immediate annuity, an insurance company guarantees that you will receive a fixed payment every month for as long as you live (or as long as you or a beneficiary are alive). But, in most cases, your money is locked up after you hand it over to the insurance company. So you don't want to tie up all of your money in an annuity.

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‍Question 3

‍Annuities are new financial products created in response to stock market volatility, disappearing pensions and Americans’ increased appetite for guaranteed income for life.

1. True
2. False

The annuity concept dates back to early Rome, when citizens would make a lump-sum payment to a contract called an annual in exchange for income payments received once a year for the rest of their lives.

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‍Question 4

‍If a 65-year-old man were to invest $100,000 in an immediate annuity today, how much would he receive in annual payouts?

1. Less than 4% of his initial investment each year
2. Exactly 4% of his initial investment each year/li>
3. More than 4% of his initial investment each year

Even in today’s low-rate environment, a 65-year-old man can buy an annuity that pays more than 6% of his initial investment annually for the rest of his life. That's because your payouts are both from earnings and a return of your principal, and you pool your risk with other policyholders. You'll receive the highest payout with an annuity that stops paying when you die.

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‍Question 5

‍Who would generally receive the larger annual payments from an immediate annuity purchased from an insurance company: A 65-year-old man or a 65-year-old woman?

1. The man
2. The woman

In general, annual immediate annuity payments are higher for men because men usually have a shorter life expectancy. Now a 65-year-old man who invests $100,000 in an immediate annuity can receive about $6,600 per year, while a 65-year-old woman could receive about $6,200 per year.

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‍Question 6

‍When it comes to buying an immediate annuity, age matters. At what age would you receive the highest annual payout based on the same initial investment?

1. 65
2. 70
3. 75

The older you are when you buy the annuity, the higher your annual payout because your life expectancy is shorter. Currently, a 65-year-old man who invests $100,000 in an immediate annuity can receive about $6,600 per year, while a 75-year-old man can receive about $9,100 per year. For this reason, some people ladder their annuities -- investing some money early in retirement to cover expenses, then adding more when they get older to boost payouts.

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‍Question 7

‍Most immediate annuity payments increase with inflation.

1. True
2. False

Standard immediate annuities guarantee that you’ll receive an annual fixed payout that will never decrease for the rest of your life. Some companies offer cost-of-living adjustments that boost the payouts to keep up with inflation. The tradeoff is a smaller initial annual payout. But the inflation-adjusted annuity can be a better deal in the long run if you survive beyond your life expectancy.

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‍Question 8

‍In most cases, deferred annuities are liquid investments that allow you to cash out your contract and get ALL your money back at any time, regardless of your age.

1. True
2. False

Although deferred annuities let you cash out at any time, you may not get all your money back. You generally have to pay a surrender charge that starts at about 7% to 10% of the account balance in the first year, and gradually decreases every year until it disappears after seven to ten years. Also, if you take the money before age 59½, you generally have to pay an early-withdrawal penalty of 10%.

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‍Question 9‍

Some deferred annuities can protect you from stock market losses.

1. True
2. False

Most deferred annuities allow you to invest your money in mutual-fund-like subaccounts. Many of these products, known as deferred variable annuities, allow you to add, for an extra fee, guarantees that you won’t lose money even if the underlying investments decline in value. If the market tanks, you can still withdraw about 5% of the guaranteed balance each year. And you can withdraw the actual account value at any time (after the surrender period expires) if your investments increase in value.

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‍Question 10

‍What happens to the money you have invested in an annuity if the insurance company goes under?

1. You lose it all/li>
2. It's protected by the FDIC
3. Up to half of your investment is protected
4. It depends on the type of annuity you buy

If you have a variable deferred annuity, your investments are held in separate accounts and won’t be affected if the insurer goes bankrupt. If you have a fixed deferred annuity or are receiving fixed immediate annuity payouts, then your payouts are protected by the state guaranty association. The level of protection varies by state. Find your state limits at www.nolhga.com.