What is an annuity?

What is an annuity?

 

An annuity is an income stream backed by an insurance company that pays out funds based on terms specified in an annuity contract.

 

Basically, annuities work in the following way:  you invest in the annuity, and then the insurance company that is the other party to the annuity contract makes payments to you on a future date or series of dates. Depending on the details of the annuity contract, the income you receive from an annuity can be paid out monthly, quarterly, annually or even in lump sum payments. Everything from Cost of Living Adjustments, Interest, period length and upfront cost vary depending on the individual annuity.

Annuities originate from a wide variety of sources. You could be awarded an annuity for winning the lottery. A Structured Settlement from a lawsuit and pension benefits are also very common. You could also purchase an annuity yourself, which is very common.

An annuity is a virtually guaranteed payment stream. But there are many different types of annuities and each has their own set of rules. The wide variety of options that can be included in annuities makes them excellent at providing specific benefits tailored to everyone’s individual needs. That is why annuities are a popular choice for investors who want to receive a steady income stream in retirement.

 

With annuity riders you can create all sorts of personalizations of an annuity. You can decide to receive payments for the rest of your life, or for a specified number of years. How much you receive from your annuity can vary depending on whether you opt for a guaranteed payout (fixed annuity) or a payout stream determined by the performance of your annuity’s underlying investments (variable annuity). You can purchase a deferred annuity in a single lump sum (called a single premium) or you could make payments over a period of years (called a flexible premium). Anyone who considers an annuity should research it thoroughly first, before deciding whether it’s an appropriate investment for someone in their situation.

 

As an investment asset historically annuities offer better rates of return than savings accounts, Certificate of Deposits or U.S. Treasuries, with minimal risk. If you are planning for retirement, an annuity grows tax-deferred and does not require a 1099 filing every year. This means that as your annuity grows in your retirement account you do not pay taxes on your growth. For many this is a way to supercharge your retirement account.