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Top Alternatives to Annuities for Retirement Income


What Is an Annuity?

In simple terms, an annuity is an insurance contract in which an individual pays a set amount of money either up front or, more commonly, over an extended period of time in exchange for a stream of income at some point in the future. The type of annuity you choose and the fees and commissions you pay for that annuity, among other factors, will affect how much money you can expect to receive in your future payments.

In order to better understand how annuities work, let’s break down the different types of annuities:

Annuity Options

Annuities are complex financial products that often include many options and terms, but they all typically fall into one of three main categories—fixed, variable, or indexed.

What Are Fixed Annuities?

A fixed annuity is a type of insurance contract that promises to pay the buyer a locked interest rate that doesn’t change based on market rates.

Two common types of fixed annuities include:

Immediate annuities are insurance contracts in which a borrower invests a lump sum of money and receives periodic payments starting immediately.

Deferred annuities are insurance contracts in which a borrower invests a sum of money—either as a one-time payment or more commonly, accumulated over time—and starts receiving periodic payments after that sum has accrued interest for a defined period, typically several years.

What Are Variable Annuities?

Variable annuities are a bit more complicated than a fixed annuity because they’re part insurance product and part investment. This means that the amount of money you receive in future income is dependent on the rate of return on the investments you choose within your annuity.

Unlike a fixed annuity, interest rates will fluctuate based on market conditions. In some cases, accepting a higher level of risk could yield higher rewards. However, unfavorable market performance could result in lower-than-expected retirement income.

What Are Indexed Annuities?

Lastly, an indexed annuity falls somewhere between a fixed annuity and a variable annuity. Indexed annuities offer a base income that is guaranteed regardless of market conditions, much like a fixed annuity. In addition, similar to a variable annuity, another portion of your future income will depend on the performance of your investments.

This combination attempts to protect owners from severe drops in the market. However, the lower risk also limits an owner’s potential returns when the market performs well.

Benefits of Annuities

Annuities offer the peace of mind of knowing you’ll have financial stability in retirement as long as your annuity can provide the income you need to cover your expenses. With the right annuity, you’ll likely never have to worry about outliving your retirement savings in the later years of your life.

Some standard features and benefits of annuities may include:

  • Guaranteed lifetime income
  • Deferred distributions
  • Guaranteed rates
  • Protection against market losses
  • Access to your funds, up to a specified limit
  • Legacy for heirs

However, annuities are very complex. Not every annuity includes the same benefits or features and may not be the right solution for everyone. It’s critical to read all of the fine print and ensure that you fully understand the product you’re buying before you sign any paperwork or pay any up-front fees

Why Do Annuities Have Such a Bad Reputation?

While annuities may provide the benefits listed above, they often receive criticism from consumer groups and finance experts. One of the most frequently cited disadvantages of traditional annuities is that most charge high up-front fees and take commissions in advance of you receiving any benefits. So right away, the amount you had saved to invest in the annuity is reduced significantly, which leaves you with smaller income payments. These fees often include investment management, as well as rider and contract fees, which can run up to 2% of your account’s value. In addition, some annuities charge surrender fees if you make more withdrawals than allotted or if you want to withdraw funds within the first few years of your contract.

Another noteworthy disadvantage is that many annuities are tax-deferred and withdrawals are taxed as ordinary income. Depending on your tax bracket, your regular income tax rate could be much higher than the capital gains tax rate you would pay for long-term investment gains.

These are just a few common downsides of annuities. Depending on the type of annuity you select, there could be even more issues that arise over time. Luckily, there are a few annuity alternatives that might better suit your specific needs.

There are Alternatives to Traditional Annuities

Annuity Alternatives from AAFMAA


Instead of buying an immediate annuity, buy ANNUITYLife. This plan offers a safe and affordable way to get secure, lifetime income from your retirement savings without the concerns you might have about traditional annuities. ANNUITYLife is a whole life insurance policy with the option to convert to a fixed stream of income immediately, or in the future, at no cost to you.

  • No upfront fees, commissions or hidden charges
  • Annuitize immediately and earn 3%
  • Exclusive AAFMAA Membership benefits

With ANNUITYLife, you get more than just an annuity income solution. Every AAFMAA policy comes with our exclusive Survivor Assistance Services as well as a free Digital Vault to securely store your essential documents with 24/7 online access. Also, up until you decide to annuitize the policy, you have whole life insurance coverage with a long-term care settlement option, at no additional cost, and you can get back all of your initial investment with no surrender charges from AAFMAA.

Visit aafmaa.com/annuitylife for more information. When you’re ready, you can start your application online and finish it by phone with an expert AAFMAA Membership Coordinator at 866-716-4579.

Wealth Builder Life Insurance

If you’re considering a deferred annuity - consider Wealth Builder Life Insurance first. You receive permanent coverage and cash value growth at a high crediting rate to build your retirement savings over time. But, should you end up needing a lifetime stream of income, after 10 years you can annuitize the cash value of your Wealth Builder Life Insurance policy at no additional cost.

You also have the long-term care settlement option, and access to AAFMAA’s exclusive Survivor Assistance Services and Digital Vault storage - all with no hidden fees, restrictions, long-term commitments, or medical exam.

Visit aafmaa.com/wealthbuilder for more information. When you’re ready, you can start your application online and finish it by phone with an expert AAFMAA Membership Coordinator at 866-716-4579.

ANNUITYLife and Wealth Builder Life Insurance are life insurance policies. These are not long-term care insurance policies. For more information, visit aafmaa.com/AL and aafmaa.com/wbli.

Subject to terms and conditions of the policy, including exclusions and limitations. There is no insurance coverage unless you apply and are accepted by AAFMAA, a policy is issued and you pay the required premium. No war, aviation, terrorist clause. All policies include Survivor Assistance Services.

ANNUITYLife and Wealth Builder Life Insurance policies are Modified Endowment Contracts (MECs) subject to the Technical and Miscellaneous Revenue Act of 1988 (TAMRA). Under TAMRA, you may owe taxes and penalties if you surrender or take a loan against the cash value in your ANNUITYLife or Wealth Builder Life Insurance policies. Please read important tax information here. AAFMAA does not provide tax advice. If you have questions about the tax implications of this product or other life insurance products you own, please consult a qualified tax professional.