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What Is an Annuity?

Term annuity refers to an insurance contract issued and distributed by financial institutions with the intention of paying out invested funds in a fixed income stream in the future. Investors invest in or purchase annuities with monthly premiums or lump-sum payments. The holding institution issues a stream of payments in the future for a specified period of time or for the remainder of the annuitant’s life. Annuities are mainly used for retirement purposes and help individuals address the risk of outliving their savings.

  • Annuities are financial products that offer a guaranteed income stream, usually for retirees.
  • The accumulation phase is the first stage of an annuity, whereby investors fund the product with either a lump-sum or periodic payments.
  • The annuitant begins receiving payments after the annuitization period for a fixed period or for the rest of their life.
  • Annuities can be structured into different kinds of instruments, which gives investors flexibility.
  • These products can be categorized into immediate and deferred annuities and may be structured as fixed or variable.

How do annuities work?

1

You purchase an annuity by making a payment to an insurance company.

2

Your annuity can grow over time.

3

When you're ready to start receiving retirement income, your annuity is turned into a steady stream of income payments.

Annuity advantages

Here are some reasons you might want to consider purchasing an annuity

Protection and growth

You want to grow your money while protecting all or some of it from loss.

Tax-deferral

You want to take advantage of tax-deferred growth.

Retirement income

You want to turn the money you’ve saved into a regular paycheck for a specified number of years or for life.

Death benefit

You’re looking for an efficient way to leave a legacy for your loved ones.

Types of Annuities

Annuities can be structured according to a wide array of details and factors, such as the duration of time that payments from the annuity can be guaranteed to continue. As mentioned above, annuities can be created so that payments continue so long as either the annuitant or their spouse (if survivorship benefit is elected) is alive. Alternatively, annuities can be structured to pay out funds for a fixed amount of time, such as 20 years, regardless of how long the annuitant lives.