What is annuity

An annuity is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future. The goal of an annuity is to provide a steady stream of income, typically during retirement.

Many aspects of an annuity can be tailored to the specific needs of the buyer. In addition to choosing between a lump-sum payment or a series of payments to the insurer, you can choose when you want to annuitize your contributions—that is, start receiving payments.

An annuity that begins paying out immediately is referred to as an immediate annuity , while one that starts at a predetermined date in the future is called a deferred annuity. The duration of the disbursements can also vary. You can choose to receive payments for a specific period of time, such as 25 years, or for the rest of your life. Of course, securing a lifetime of payments can lower the amount of each check, but it helps ensure that you don't outlive your assets, which is one of the main selling points of annuities.

Annuities come in three main varieties: Fixed, variable, and indexed. Each type has its own level of risk and payout potential. Fixed annuities pay out a guaranteed amount. This type of annuity comes in two different styles—fixed immediate annuities, which pay a fixed rate right now, and fixed deferred annuities, which pay you later. The downside of this predictability is a relatively modest annual return, generally slightly higher than a certificate of deposit CD from a bank.

Variable annuities provide an opportunity for a potentially higher return, accompanied by greater risk. In this case, you pick from a menu of mutual funds that go into your personal "sub-account.

Indexed annuities fall somewhere in between when it comes to risk and potential reward. Variable and indexed annuities are often criticized for their complexity and high fees compared with other kinds of investments. Despite their potential for greater earnings, variable and indexed annuities are often criticized for their relative complexity and their fees.

Many annuitants , for example, have to pay steep surrender charges if they need to withdraw their money within the first few years of the contract. An important feature to consider with any annuity is its tax treatment. Life insurance companies and investment companies are the two primary types of financial institutions offering annuity products. For life insurance companies, annuities are a natural hedge for their insurance products.

Life insurance is bought to deal with mortality risk, which is the risk of dying prematurely. Policyholders pay an annual premium to the insurance company who will pay out a lump sum upon their death. If the policyholder dies prematurely, the insurer pays out the death benefit at a net loss to the company. Actuarial science and claims experience allow these insurance companies to price their policies so that on average insurance purchasers will live long enough so that the insurer earns a profit.

In many cases, the cash value inside of permanent life insurance policies can be exchanged via a exchange for an annuity product without any tax implications.

Annuities, on the other hand, deal with longevity risk, or the risk of outliving one's assets. The risk to the issuer of the annuity is that annuity holders will survive to outlive their initial investment. Annuity issuers may hedge longevity risk by selling annuities to customers with a higher risk of premature death. A life insurance policy is an example of a fixed annuity in which an individual pays a fixed amount each month for a pre-determined time period typically The payout amount for immediate annuities depends on market conditions and interest rates.

Annuities can be a beneficial part of a retirement plan, but annuities are complex financial vehicles. Because of their complexity, many employers don't offer them as part of an employee's retirement portfolio. The easement of these rules may trigger more annuity options open to qualified employees in the near future.

Annuities are appropriate financial products for individuals seeking stable, guaranteed retirement income. Because the lump sum put into the annuity is illiquid and subject to withdrawal penalties, it is not recommended for younger individuals or for those with liquidity needs to use this financial product.

Annuity holders cannot outlive their income stream, which hedges longevity risk. The surrender period is the amount of time an investor must wait before they can withdraw funds from an annuity without facing a penalty. Withdrawals made before the end of the surrender period can result in a surrender charge, which is essentially a deferred sales fee.

This period generally spans over several years. Investors can incur a significant penalty if they withdraw the invested amount before the surrender period is over. Annuities are generally structured as either fixed or variable instruments. Fixed annuities provide regular periodic payments to the annuitant and are often used in retirement planning.

Variable annuities allow the owner to receive larger future payments if investments of the annuity fund do well and smaller payments if its investments do poorly. This provides for less stable cash flow than a fixed annuity but allows the annuitant to reap the benefits of strong returns from their fund's investments.

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Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Riders Riders are addendums that allow the customization of basic annuity contracts.

Beneficiaries You can add a death benefit rider to your contract to ensure that your beneficiary receives a portion of the contract value. Fees and Commissions The fees and commissions for annuities vary by the type of annuity. Fixed annuities generally have the lowest fees. Taxation One of the most attractive features of annuities is their favorable tax treatment from the IRS.

If your annuity was purchased with money that you've already paid taxes on, then only your earnings will be taxed when the money is withdrawn. Annuities come in two basic configurations: immediate or deferred. Funded with a single lump-sum payment Guaranteed monthly payouts Supplement your retirement savings. Tax-deferred premium growth Guaranteed lifetime income that begins on the date you specify More income later because your money accumulates longer.

Christopher Magnussen How much guaranteed income can I expect to receive from an annuity each month? Chris Magnussen, Licensed Agent at Annuity. Earns a guaranteed rate of interest for a set period of time Rate of interest may be guaranteed for a set period of time or may fluctuate from anniversary to anniversary Backed by the insurance company that issued it.

Earns interest through investments you select within the annuity Does not guarantee a return but offers more growth potential. Interested in Purchasing an Annuity? Learn about the different types of annuities and find out which one is right for you. Request Your Free Quote. Reasons to buy an annuity include: Long-term security Tax-deferred growth Principal protection Probate-free estate distribution Inflation adjustments Death benefits for heirs.

Christopher Magnussen What are the benefits you get from working with the independent agents at Annuity. Tax-Deferred Growth You save money without paying taxes on the interest until a later date. Fund Your Retirement Annuities create predictable income streams for life. Provide for Your Family Death benefit riders allow you to transfer your money to your loved ones.

Gender Your gender is a key factor in determining your life expectancy, which annuity carriers use to calculate your income benefits from an immediate annuity. Calculate Monthly Income. Full Name. Phone Number. Other common concerns about the structure and design of annuities include: Commissions and fees Complexity Conservative returns as compared with investment products Loss of potential returns from other investments.

Get a Free Consultation Our trusted network of advisors will listen to you and guide you toward an annuity that will allow you to achieve your goals. Get a Free Consultation From a Financial Expert Work with our trusted financial planners to find an annuity that meets your financial needs. Get a Free Quote Now. Related Terms Annuity Issuer The insurance company that sells the annuity and pays the income benefits.

The issuer assumes the financial risk in exchange for annuity premiums. Learn More: Annuity Rates. Learn More: Annuity Payout Options. What are annuities? Annuities are financial instruments that earn interest and provide a guaranteed stream of payments over a predetermined amount of time. An annuity is often used to fund retirement and can come in a variety of types that align with different financial goals and risk tolerance.

How much does an annuity cost? All annuities share similar fees, but the total cost of an annuity can differ by type. When you purchase an annuity, you pay a premium that can be converted into a fixed income stream. What are the benefits of an annuity? Annuities offer a stream of income, provide tax advantages , can grow tax-deferred over time and have no contribution limits. In the event of death, annuities also offer riders that allow you to transfer money to your beneficiaries.

Are annuities safe? Purchasing an annuity is among the safest options for long-term financial planning. They are insurance products, so they experience less volatility with market fluctuations, although some annuity types have higher risks — and higher potential rewards — than others. Annuity payable for a guaranteed period: The annuity is to be paid for a guaranteed period, say 5, 10 or 15 years even if the annuity buyer dies.

Annuity stops either on the death of the annuitant or completion of the guaranteed period, whichever is later. Though it may not be linked to the actual inflation rate, the rationale is that it would take care of the increase in expenses to some extent.

Joint life survivor annuity: It keeps paying till either you or your spouse is alive. Joint life annuity with return of purchase price: It keeps paying till you or your spouse is alive. In the case of death of the both, the nominee is entitled to get the initial invested amount.

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