Annuities

An annuity is a contract between you and an insurance company in which the company promises to make periodic payments to you, starting immediately or at some future time. You buy an annuity either with a single payment or a series of payments called premiums.

Some annuity contracts provide a way to save for retirement. Others can turn your savings into a stream of retirement income. Still, others do both. If you use an annuity as a savings vehicle and the insurance company delays your pay-out to the future, you have a deferred annuity. If you use the annuity to create a source of retirement income and your payments start right away, you have an immediate annuity.

Why do people buy annuities?

People typically buy annuities to help manage their income in retirement. Annuities provide three things:

• Periodic payments for a specific amount of time. This may be for the rest of your life or the life of your spouse or another person.
• Death benefits. If you die before you start receiving payments, the person you name as your beneficiary receives a specific payment.
• Tax-deferred growth. You pay no taxes on the income and investment gains from your annuity until you withdraw the money.

Benefits of Annuities

• There are three kinds of annuities: fixed, variable, and indexed.
• Fixed annuities are risk-free and pay a fixed amount either in a one-time, lump-sum payment or on a monthly, quarterly, or annual basis.
• Variable annuities can rise or fall in value depending on the interest rate, but any earnings grow tax-deferred.
• Indexed annuities are tied to the performance of an index, such as the S&P 500, and provide you with a return based on that performance, though not to fall beneath a certain minimum.