With Baby Boomers retiring at a record rate, income for retirement is a topic that generates much discussion in the over-60 population. Included in those discussions could be ideas for buying annuities for long-term financial goals.

What often happens, during conversations such as this, is many people do not understand how annuities work or whether they are good products for them to consider.

Our staff at the Kansas Insurance Department has put together some basic information that might help fellow Kansans when they are considering those financial products.

The information below appears in the KID publication “Life Insurance and Annuity Basics,” which can be ordered as a hard copy from our department or viewed online at www.ksinsurance.org.

What is an annuity?
An annuity is a financial contract in which an insurance company makes a series of income payments to you at regular intervals in return for a premium or premiums that you have paid. Annuities are most often purchased for future retirement income. Only an annuity is designed to pay an income that can be guaranteed to last as long as you live.

An annuity is neither a life insurance policy nor a health insurance policy. It’s not a savings account or a savings certificate, and you shouldn’t buy annuities for short-term financial goals.

Your value in an annuity contract is the amount in premiums you have paid, minus any applicable charges, plus any interest your premiums have earned.

How are premiums paid to an annuity?
Annuity premiums can be paid in either one payment for a single premium annuity or in a series of payments for a multiple premium annuity.

For example, when you retire, you may choose to move a lump sum from a pension plan to an annuity in order to collect monthly payments from it. This would be considered a single premium annuity.

Conversely, if you decide at a younger age to begin saving for retirement, you might choose to purchase an annuity and make smaller monthly payments into the plan over a period of 20 years. This would be an example of a multiple premium annuity. Multiple premium annuity payments can be made either on a regularly scheduled basis, or in flexible payments, allowing you to pay as much premium as you want within set limits.

Consulting with a trusted financial consultant about the best method for you to fund an annuity will be beneficial for your individual needs.

When will I begin receiving payments from my annuity?
Receiving payments from your annuity depends on whether you’ve chosen an immediate annuity or a deferred annuity.

Immediate annuities begin paying within one year of premium payment, though many actually begin paying within one or two months of receiving a premium payment. Because of this, immediate annuities must be purchased using one large lump sum single premium. You cannot purchase an immediate annuity with multiple premiums.

Deferred annuities delay payment until a later date specified in your annuity contract (for example, 10 or 20 years in the future). Deferred annuities can be purchased with either a single premium payment or multiple premium payments.

Much more general information on annuities is available from our KID publications; by calling our Consumer Assistance Division Hotline, 1-800-432-2484; or by going to our online chat feature at www.ksinsurance.org.

Ken Selzer, CPA, is the Kansas Commissioner of Insurance.