What Is An Annuity?

An annuity is a contract between an individual and an insurance company wherein the insurance company promises future income for the one time or multiple investments made by the person. Annuities are basically tax deferred retirement savings plans offered by insurance companies. The investor is expected to invest a required amount of money, in return the insurance company credits regular earnings into the person’s account and also consent to annuitize if the investor so desires. By choosing to annuitize the individual gets back the principal amount along with the regular payments. Furthermore the money can be taken out as a lump sum or in parts over a fixed period of time, say in 10 years time.

Annuities are tax deferred and this is a primary reason a lot of investors invest in them. Tax deferred means that the income from the annuity cannot be taxed until it is withdrawn or received as payment. For individuals seeking to invest money an annuity gives them an opportunity to create a large bank balance that is non-taxable. While for people looking for stability in the years after retirement annuities allows them to secure a guaranteed earning for a lifetime.

There are different types of annuities and some of them include:

Fixed Annuity: A fixed annuity assures the investor of the principal amount and a minimum rate of interest. Thus as long as the insurance company is solvent the investor is assured of basic amount of income along with the amount invested initially. The state insurance departments regulate fixed annuities.
Variable Annuity: Variable annuities are based on the performance of the company and don’t assure a basic rate of return to their investors. An example of variable annuity is the mutual fund. These too are regulated by state insurance departments and also the Federal Securities and exchange Commission.
Equity-Indexed Annuity: A equity-indexed annuity borrows some features from both the fixed annuity and the variable annuity. While it offers a minimum rate of interest like the fixed annuity it is also valued for its performance in the stock market.
Deferred Annuity: A deferred annuity allows the investor to choose to get the premium and income at a later date.
Immediate Annuity: In this case the investor begins to receive the income from the annuity soon after making the payment for the premium.
Market Value Adjusted Annuity: This type of annuity is characterized by the choice it gives the investor to select the time frame and rate of interest available on the annuity. Also it provides the option of withdrawal of funds before the end of the chosen time period.
Fixed Period Annuity: A fixed period annuity is for a set period of time and not dependent on the age of the investor. It is dependent on the amount of money invested and the time period.
Lifetime Annuity: A lifetime annuity as the name suggests provides income for the individual’s lifetime.

Whatever type of annuity you choose they are an excellent investment and taxing saving option as also a great way to build up a nest egg for your retirement.

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