An annuity is a financial product, typically issued by an insurance company, that provides a series of payments made at regular intervals to an individual, usually for retirement income purposes
. It involves a contract where the purchaser pays either a lump sum or periodic premiums to the insurer, who in return agrees to make payments either immediately or at a future date, often for the remainder of the annuitant's life or for a fixed period
. Key features of annuities include:
- Types of Annuities :
- Immediate annuities start payments right away.
- Deferred annuities begin payments at a later date.
- Fixed annuities pay a guaranteed fixed amount.
- Variable annuities payments vary based on investment performance.
- Indexed annuities link returns to a market index like the S&P 500
- Purpose : Primarily used to provide a reliable income stream in retirement, helping individuals manage the risk of outliving their savings
- Participants : The contract involves the owner (who pays premiums and controls the contract), the annuitant (whose life expectancy determines payments), and the beneficiary (who may receive benefits after the annuitant's death)
- Benefits :
- Guaranteed income for life or a set period.
- Tax deferral on earnings until withdrawal.
- Death benefits ensuring at least the return of premiums paid
Annuities are complex products with various fees and conditions, so understanding contract details and costs is essential before purchasing
. They are distinct from life insurance, as annuities focus on income provision rather than death benefits
. In summary, an annuity converts a lump sum or series of payments into a steady income stream, often used to secure financial stability during retirement
