An annuity is a financial contract between an individual (the purchaser or annuitant) and an insurance company, where the individual pays a lump sum or a series of payments (premiums) in exchange for a stream of income payments made by the insurer. These payments can begin immediately or at a specified future date and can last for a fixed period or for the lifetime of the annuitant
. Annuities are primarily used to provide a steady, guaranteed income during retirement, helping individuals manage the risk of outliving their savings. The income can be fixed, variable, or indexed to an equity index such as the S&P 500
. The contract typically involves two main phases: the accumulation phase, where money is paid into the annuity and grows tax-deferred, and the annuitization phase, when income payments begin
. There are different types of annuities:
- Immediate annuities : Payments start soon after a lump sum is paid.
- Deferred annuities : Payments begin at a future date, allowing the investment to grow tax-deferred.
- Fixed annuities : Provide a guaranteed fixed income.
- Variable annuities : Payments vary based on investment performance.
- Indexed annuities : Returns are linked to a market index
Annuities offer benefits such as lifetime income guarantees, death benefits to beneficiaries, and tax deferral on earnings until withdrawal
. They are often purchased to secure financial stability in retirement, providing peace of mind through predictable income
. In summary, an annuity is a financial product designed to convert savings into a reliable income stream, commonly used for retirement planning
