Do Banks Offer Annuities? What You Need to Know

Annuities are financial contracts, usually between an individual and an insurance company, designed to provide a steady income stream, often for retirement. Purchasers make a lump-sum or series of payments for future regular disbursements. While insurance companies are primary issuers, many banks also offer annuities through their investment or wealth management divisions. Annuities purchased through banks are insurance products, not bank products, and are not insured by the Federal Deposit Insurance Corporation (FDIC).

Common Annuity Types Offered by Banks

Banks provide access to several common annuity types, each with distinct characteristics for value accumulation and payment distribution. Fixed annuities offer a guaranteed interest rate for a set period, providing predictable growth and income. The insurer declares the interest rate in advance, which can be guaranteed for several years and will not fall below a minimum rate stated in the policy.

Variable annuities tie returns to underlying investment options, known as sub-accounts. These annuities offer potential for higher returns but carry market risk, as account value fluctuates with investment performance. Variable annuities include features like guaranteed death benefits and living benefits, which often come with additional fees.

Indexed annuities link returns to a specific market index, such as the S&P 500, but include a floor and a cap on returns. This structure protects the principal from market losses (a 0% floor), while limiting upside potential by a cap or participation rate. Interest is credited based on a formula tied to the index’s performance, but the principal is not directly invested in the market.

Immediate annuities convert a lump sum into an income stream that starts within 12 months of purchase. These are suitable for individuals in or nearing retirement who need immediate, predictable income. Deferred annuities allow money to accumulate and grow tax-deferred before payments begin at a future date. This type is used for long-term retirement planning, allowing for growth during an accumulation phase.

Steps to Acquire a Bank Annuity

Acquiring an annuity through a bank begins with a consultation with a financial advisor or a representative from the bank’s wealth management department. The advisor conducts a needs assessment to understand your financial goals, risk tolerance, and time horizon. This assessment helps determine if an annuity aligns with your financial plan and objectives, such as generating retirement income or preserving capital.

After the needs assessment, the advisor presents suitable annuity options, providing illustrations that project potential returns and outline costs. Once a product is selected, the application process involves completing forms and providing personal and financial information for review.

Funding the annuity can occur through a lump-sum payment or, for deferred annuities, a series of premium payments. Funds can also be transferred from existing retirement accounts, such as IRAs or 401(k)s, though specific rules and tax implications apply. After funding, the application undergoes review and approval by both the bank and the issuing insurance company.

Upon approval, the annuity policy is issued, and contract documents are delivered. Review these documents to ensure all terms and conditions match your understanding. This step formalizes the agreement and initiates the annuity contract.

Important Considerations for Bank Annuities

Before committing to a bank-offered annuity, evaluate several factors to ensure it aligns with your financial strategy. Fees and charges can significantly impact an annuity’s net returns. Common costs include administrative fees, which cover contract management, and mortality and expense (M&E) charges, particularly in variable annuities, which compensate the insurer for guarantees like death benefits. Additionally, variable and indexed annuities may have underlying investment fees or expense ratios, ranging from approximately 0.6% to 3% annually.

Surrender periods typically range from six to ten years, during which early withdrawals can incur substantial surrender charges. These charges, which can be as high as 7% in the first year and decline over time, are designed to discourage early access to funds and ensure the annuity serves its long-term purpose. Understanding these periods is crucial as annuities are generally intended for long-term financial goals, such as retirement income, rather than short-term liquidity needs.

The financial strength of the issuing insurance company is key, as an annuity is a contractual promise from that insurer. The security of your investment relies on the insurer’s ability to meet its obligations. Independent rating agencies such as AM Best, Standard & Poor’s, Moody’s, and Fitch provide financial strength ratings, which can help assess an insurer’s stability. While state insurance guaranty associations may offer some level of protection, typically up to $250,000, these limits vary by state and do not cover all potential losses.

Interest rates and crediting methods differ across annuity types. Fixed annuities provide a predetermined, guaranteed interest rate for a period. Indexed annuities link returns to a market index, often with a cap on gains and a floor of zero for losses. Variable annuities’ returns depend on the performance of chosen sub-accounts. Understanding how interest is calculated and applied ensures the annuity’s growth potential meets your expectations.

Tax implications warrant careful review. Annuity earnings grow tax-deferred, meaning taxes are not typically paid until withdrawals begin. When distributions are taken, they are taxed as ordinary income, not capital gains. Withdrawals made before age 59½ may be subject to a 10% federal tax penalty, in addition to regular income taxes, unless a specific IRS exception applies. The tax treatment also depends on whether the annuity is “qualified” (funded with pre-tax dollars, fully taxable upon withdrawal) or “non-qualified” (funded with after-tax dollars, only earnings are taxed).

Suitability requires the annuity to align with your personal financial situation, including your age, income, existing assets, and liquidity needs. Regulations, such as the NAIC Suitability in Annuity Transactions Model Regulation, require advisors to ensure an annuity recommendation is appropriate for the consumer’s objectives and risk tolerance. It is generally recommended that annuities not comprise more than 60% of your retirement assets to maintain diversification and access to liquid funds for emergencies.