Frequently Asked Questions

Annuities and traditional savings accounts are both considered low-risk investment options that earn interest. However, there are many differences, including fees, liquidity and the minimum amount of money required to open an account.

Annuities and retirement accounts — such as 401(k) plans and Individual Retirement Accounts (IRAs) —feature tax-advantaged ways to save for retirement. However, IRAs and 401(k) place your money in investments, while annuities are insurance products that grow money in various ways.

Annuities also generally have higher fees than retirement accounts, but without the same annual contribution limits.

A key advantage of annuities is the ability to save money for your future without paying taxes on the interest until later.

Unlike retirement accounts, there’s no limit on annuity contributions.

One of the most attractive features of annuities is creating a guaranteed stream of income. Many people worry about outliving their savings in retirement, and annuities help hedge against this risk.

Annuities can be complex. They may not grow your money as quickly as other options, such as investing directly into the stock market.

Annuities also lack liquidity, which means it’s difficult to quickly access additional money without incurring high fees.

If your financial priorities change, you can sell your future annuity payments back to the insurance company at a discounted rate in exchange for cash. You can sell your entire annuity or just part of it.

If you sell future payments, you will receive less money than if you had continued the original payment schedule specified in your contract.

There are three main types of annuities: Fixed, fixed indexed and variable.

Fixed annuities are tied to a guaranteed interest rate and are the lowest risk option. They offer fixed, predictable payouts.

Variable annuities carry greater risk because account growth is tied to an investment portfolio. Payout size can vary based on the market.

Indexed annuities feature characteristics of both fixed and variable. Growth is linked to a portion of a market index return, such as that of the S&P 500. This makes index annuities less risky than variable annuities while offering greater earning potential than fixed annuities.

If you want to set aside additional money for retirement, an annuity's tax-free growth can be beneficial. If you’ve already maxed out other retirement savings vehicles, such as a 401(k) or IRA, annuities may be even more appealing.

You may also consider purchasing an annuity if your market risk tolerance is low. An annuity is considered a low-risk financial product that can guarantee lifetime periodic payments.

If this appeals to you, you may want to consider purchasing an annuity.

The terms immediate and deferred indicate when payouts from the insurance company begin.

Payouts from immediate annuities start less than a year after purchase.

Deferred annuities payouts, on the other hand, begin in the future, such as at the beginning of retirement.

Yes, but it may be expensive to do so.

If you withdraw money from an annuity before the age of 59.5, you will face a 10 percent tax penalty from the Internal Revenue Service.

You may also face a surrender charge if you withdraw money from your account early in your contract.

Yes, but how they are taxed and how much you’ll owe can vary.

For example, qualified annuities use pre-tax dollars and are often funded using a 401(k) or IRA. Because this money hasn’t been taxed yet, payouts from this annuity type are fully taxable as income.

However, annuities purchased with a Roth IRA or Roth 401(k) usually enjoy tax-free payouts.

Annuities funded with after-tax dollars are considered nonqualified. Money you originally contributed to the account is not taxed, but any earnings or interest is taxed at your regular income rate.

Withdrawing money early in your annuity contract can result in surrender charges.

Many insurers levy this fee if you take money from your account within the first five to seven years. The average surrender charge is around 7 percent but may be as high as 20 percent.

Surrender charges tend to decrease each year. So, taking money from your annuity after a year will have a higher surrender fee than taking money out after five years.

Some annuities let you withdraw up to 10 percent a year from your account without paying a surrender fee.

Possibly. Fixed annuities guarantee the safety of your principal, or the money given to the insurer to fund your annuity.

Fixed indexed annuities offer premium protection that safeguards your initial investment when the market is down.

According to the U.S. Securities and Exchange Commission, it’s possible to lose money in a variable annuity, including potential loss of your original investment, or principal.

That’s because the value of a variable annuity and its returns are linked to investment options you select. If those investments do poorly, you can lose money.

It depends on how you structured your annuity contract with the insurance company.

With some annuities, payments end when you die.

But if the annuity contract has a death benefit provision, the insurer will continue making payments to your spouse or other designated beneficiary.

If your annuity contract includes a death benefit, your selected beneficiary will either receive all the remaining funds or a guaranteed minimum amount.

There are a few different ways nonspousal beneficiaries can receive the money after you pass away. This includes taking a one-time lump sum, stretching payments over the beneficiary's lifetime or taking payments over five years.

Spouses may also have the option to continue the original contract as the annuity’s new owner.

You will owe income tax on the difference between the principal paid into the annuity and the value of the account when the owner dies. Taxes are not owed until money is withdrawn from the account.

Beneficiaries can lessen their tax burden by spreading payments over a longer period. Taking a lump sum comes with the highest tax consequences.

Right now is the best time to buy a policy. Disability insurance costs increases with age. If you’re in good health, you should easily qualify for a policy — and can lock in better rates at this age. However, if your health declines, you may no longer be insurable at an affordable premium

You should have enough to cover your living expenses (rent/mortgage, groceries, utilities, etc.). For most people, benefits equal to 60% of their pre-tax salary is recommended.

Maybe not — you should check the amount of coverage you have and the terms of your policy. But you might still consider purchasing an individual disability insurance policy for a number of reasons:

• If you switch jobs, you probably won’t be able to take your LTD coverage with you. Depending on your age and health, it could be difficult to obtain new LTD insurance if your new employer doesn’t offer it or you plan on being self-employed.

• Your coverage through work might not be enough. If your employer pays the premium, then any benefits you receive are taxed. This could leave you with an income “gap” if you’re out of work with a long-term injury or illness.

• Many group policies have caps on coverage, so employees with higher salaries could be underinsured. There are supplemental disability policies you can purchase to close that income gap.

The benefit amount is based on a percentage of your current income. Typically this will be in the 60% range of gross (pre-tax) monthly salary. But remember that if you buy your own policy (with after tax dollars), your benefits will not be taxed. So a 60% coverage benefit could be pretty close to your current monthly take-home pay.

It’s the amount of time you have to wait from the first day you get ill or injured to when you start receiving benefits. Disability policies can carry elimination periods of 30, 60, 90, 180 or 365 days. Generally, the longer the elimination period, the lower your premiums will be. But keep in mind a few important things:

• Most policies are designed to be most cost-effective with at least a 90-day waiting period.

• Individual LTD policies usually pay at the end of each month, so if you have a 90-day elimination period, you will not receive your first claim check until the 120th day.

• You should look at your financial situation to determine how long you can be without an income to decide what elimination period is best for you.

It’s the length of time for which you’re eligible to receive monthly benefits while you have an illness or injury that keeps you out of work. Policies commonly pay for two, five, or 10 years or up to retirement age. The longer the benefit period, the higher the cost will be. A five-year benefit period would cover the average duration of long-term disabilities across age groups. But depending on your age and health, a policy that covers you to age 65 (i.e., pays for a permanent disability) and gives you extra peace of mind might not cost that much more.

• Own-occupation coverage: An own-occupation policy defines a disability as the inability to work at your regular occupation, even if you still might be able to work at another occupation. For example, a surgeon with hand tremors who takes a job as a medical school lecturer would be eligible for LTD benefits under an own-occupation policy because they can’t perform the duties of their own occupation.

• Non-cancelable coverage: This feature is a rate guarantee and ensures the insurer can never raise rates on the policy or cancel it (unless you stop paying premiums). This is particularly important for younger buyers who want to lock in a low rate until retirement.

• Residual benefits: Under a residual benefits disability provision (either in the policy or available by rider), you’ll receive partial benefits if your illness or injury has reduced your income but you’re still able to work (for example, if you’re only able to work part-time hours, a residual benefit will make up for the income loss).

• Cost of living adjustment (COLA): Individual disability income policies generally offer a cost of living rider that will increase benefits for inflation during a long-term claim.

• Future increase option: As long as your increased income qualifies for more coverage under the company’s issue limits, the future increase option guarantees your right to purchase additional coverage up to a stated age without having to undergo medical underwriting again.

• Guaranteed renewable option: This renewability feature is a notch below the non-cancelable feature we discussed above. It means an insurer can never change or cancel a policy as long as you keep paying the premiums. However, it does not have a rate guarantee.

• Unemployment waiver of premium: With this rider, if you were to lose your job, the premium on your disability policy would be waived.

• Catastrophic disability benefit: If you experience a disability that results in: your inability to carry out two or more activities of daily living (e.g., bathing and dressing yourself), cognitive impairment, or total and permanent loss of sight in both eyes, hearing in both ears, or other specified disabilities, this additional rider may cover up to 100% of your previous income from all sources

It depends on the policy. Some disability policies pay out the full benefit regardless of whether you qualify for workers' compensation or Social Security Disability. Other policies will require you to apply for government benefits for which you might be eligible and will offset the benefit payment by the amount you receive from government aid.

You should expect to pay between 1% to 3% of your annual salary (women can expect a slightly higher range of 2% to 4%). These percentages are a rough estimate, based on selection of certain benefits and options. Most important is that your advisor understands your unique situation and ensures that the disability policy recommendation takes that into account.

The length of time for the issue of a policy will vary depending on the number and nature of additional requirements for that particular case. Companies may wish to acquire medical records for previous medical issues and sometimes this process can take many weeks. Generally, you can expect a disability policy to be issued within five to six weeks.

It depends on the policy you purchase. Some policies cover a wide range of services and situations, while others are much more focused in their coverage.

One question related to all of this that you should ask yourself before you agree to buy a particular policy: am I willing to accept some of the financial risk and responsibility should I end up needing some sort of long-term care?

If you are, you should be able to save money by buying a policy with a lower daily or monthly benefit, a shorter benefit period, or longer elimination period.

It definitely can be. As is often the case with insurance products, though, it depends on what kind of policy you buy.

Also, if you're fairly young and healthy, or if you don't think you'll need much long-term care for some other reason, you'll probably pay a lot less for one of these policies than someone who is older, has health issues, or has a stronger need for extended care.

According to the 2015 Long Term Care Insurance Price Index, published by the American Association for Long-Term Care Insurance, a healthy 55-year-old man should expect to pay approximately $1,060 per year for $164,000 worth of benefits.

A single, 55-year-old woman looking for the same coverage, on the other hand, can expect to pay about $1,390 per year.

Finally, a married couple made up of two 60-year-olds should plan on paying somewhere in the ballpark of $2,220 each year for coverage totaling around $328,000.

Don't take this information to be gospel, though, as rates tend to differ wildly from company to company. So, take your time, shop around, and field long-term care insurance quotes from a number of providers before settling on a particular policy.

Possibly. It isn't unusual for insurance companies to deny coverage to people with certain pre-existing conditions. It also isn't usual for providers to refuse to pay for care that's related to certain pre-existing conditions until some amount of time has passed.

As a result, read the fine print of any long-term care insurance policy you're thinking of buying, and ask your agent, broker, or financial planner plenty of questions if you're still confused after you review the paperwork.

Also, this definitely is one of those instances when being turned down by one company doesn't necessarily mean you'll be turned down by another, so don't shy away from reaching out to a handful of them for long-term care insurance quotes.

Most experts suggest that it's best to purchase long-term care insurance during the period between your mid-50s and mid-60s.

You're free to buy it when you're younger than that, of course, but doing so may not make the most financial sense for you or your loved ones.

In general, your premium payments will be based on your age, your health, and the kinds and amounts of protection you choose when you apply.

You definitely shouldn't expect that your premiums will stay the same forever. That also doesn't mean, though, that they will dramatically increase over time.

Your best bet here is to accept that even if your particular policy is "guaranteed renewable," what you pay for that policy could very well increase at some point down the road.

A few possibilities: go with a shorter benefit period (the number of months or years you can receive benefits), or a longer elimination period--which is the waiting period you have to endure before your coverage kicks in. (This period lasts somewhere between 30 and 90 days for most people.)

Two other options: consider reducing your daily or monthly benefit—the amount your policy will pay per day or month once you've triggered your benefits--or consider purchasing a shared policy. (More information on shared policies can be found below.)

Medicare shouldn't be considered an acceptable alternative because it doesn't cover most of the costs related to long-term care. It doesn't cover assisted living or the on-going use of a home health aide, nor does it cover extended stays in skilled-nursing communities ("nursing homes").

Medicaid, on the other hand, is a much more acceptable alternative to long-term care insurance—if you're eligible for it. And to be eligible for it, you have to be below certain financial and health thresholds. This is why you may have heard of people "spending down"—using up their assets—in order to qualify for Medicaid's assistance.

Shared policies--or shared care policies, as they're sometimes called—allow you and your spouse, partner, or adult relative to pool benefits that can be divided between the two of you. As an example, a three-year policy will provide you and your spouse, partner, or relative with six years of coverage. If they use just two years of it, you will be able to use the remaining four.

Although shared policies tend to cost more than traditional long-term care insurance policies, they also may provide you and your loved one with more coverage for less money than you would spend on separate policies. At the very least, they allow you to buy a shorter policy than you may buy otherwise.

Hybrid policies, which are becoming increasingly popular among consumers, combine long-term care coverage with other forms of insurance. Specifically, they usually combine long-term care coverage with universal life insurance or fixed annuities.

One of the benefits of a hybrid policy is that if you pass away without using up all of your long-term care coverage, your heirs will be given a partial refund of your premiums.

Another benefit relates only to women, as some of them will pay less for a hybrid policy than they would for a traditional long-term care insurance policy.

Yes, it is. Specifically, you can use a life-insurance policy to help pay for the expenses related to long-term care by taking advantage of the following options:

• Accelerated Death Benefits—this feature allows you, under specific circumstances, to receive an advance on your life-insurance policy's "death benefit" while you're still alive
• Life settlements—this option allows you to sell your life-insurance policy for its current value, although it's usually limited to people over a certain age (70 for men, 74 for women)
• Viatical settlements—this situation also lets you sell your policy, although this time you're selling it to a third party and have to be terminally ill to take advantage of it

Without going into too much detail about any of them, you could think about buying and using one of the hybrid policies mentioned earlier, or you could look into disability insurance, some annuities, or even reverse mortgages.

I don't think anyone would say your living situation should cause you to "ignore" long-term care insurance. That said, it may allow you to ignore certain aspects of it. For example, you could focus your attention on policies—or policy options—that focus on paying for skilled-nursing community stays rather than in-home care assistance, which should help you save money.