All About Annuities

Annuities You’re not alone if you’re confused about annuities. Here’s a little help. Basically, you can purchase an annuity in two ways: make one lump-sum payment to buy a single-premium annuity, or make continuing contributions to a flexible-payment annuity.

You can buy two types of annuity: fixed or variable. Fixed annuities earn a guaranteed rate of interest for a specific time period, such as one, three or five years. Variable annuities typically offer a range of investment or funding options, and the principal and return you earn depend on the performance of these investment options.

An annuity contract is created when a person invests money with a life insurance company, which may grow on a tax-deferred basis and may then be distributed back to the investor. In the United States these contracts are outlined by the Internal Revenue Code and regulated by the individual states. Annuities have two possible stages: one in which the client deposits and accrues money into an account, and another in which they receive payments for some period of time.

Annuity payments do not change once they begin, even to account for inflation. Many experts feel that annuities are a poor choice for most people when considered in close detail. The growth of an annuity is fully taxable as income, both to you and your heirs. Annuities also have very high expenses, and there’s always a charge for mortality insurance.