Aug 06 2010

What is an annuity?

Category: Finance


An annuity is an insurance product that is often used in conjunction with a retirement plan. It is, in essence, an agreement between an investor and an insurance company. The investor will purchase the annuity making a large lump sum payment and in return, the insurance company agrees to make intermittent payments to the investor. Annuities are popular for retirement because they provide a stream of steady income. The payments will begin immediately or at some point in the future at either fixed or variable rates depending on the contract. Examples of different annuity types are listed below.

Deferred Annuity – Deferred annuities accumulate money on a tax-deferred basis and are paid out in the future. When payments begin it is treated as an immediate annuity.

Immediate Annuity – With immediate annuities you begin to receive payments immediately after the initial investment and taxes are handled accordingly.

Deferred and immediate annuities can further be broken down into the categories below.

Fixed Annuity – Fixed annuities pay a guaranteed rate of interest.

Variable Annuity – Variable annuities give you the ability to choose investments. It will pay out depending on the performance of those investments.

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