An annuity is neither a life insurance nor a health insurance policy, and it is not a savings account or a savings certificate. It is a contract with an insurance company in which the company makes a series of income payments at regular intervals in return for a premium or premiums you have paid.
Annuities are most often bought for future retirement income. Only an annuity can pay an income that can be guaranteed to last as long as you live. You should not buy an annuity to reach short-term financial goals.
Deferred annuities have an accumulation period and a payout period. During the accumulation period, the money you put into the annuity, less any applicable charges, earns interest. The earnings grow tax-deferred as long as you leave them in the annuity. During the payout period, the company pays income to you or to someone you choose. Your value in an annuity contract is the premiums you have paid, less any applicable charges, plus interest credited. The insurance company uses the value to figure the amount of most of the benefits that you can choose to receive from an annuity contract.
Fixed annuities guarantee your money will earn at least a minimum interest rate. Deferred annuities offer a basic death benefit, usually have a surrender or withdrawal charge if you take money out too early, and any money your annuity earns is tax deferred. You will pay ordinary income tax when you take a withdrawal or receive payments, and you may owe a 10% tax penalty before age 59 1/2.
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Educational content provided by Jeffrey Scott McLeod, LUTC, National Insurance Producer License #558629. This is for informational purposes only and is not a recommendation to buy or sell any annuity. Guarantees are subject to the claims-paying ability of the issuing insurance company. Always consult your own advisor and read the full NAIC Buyer’s Guide. For residents of your state.
Jeffrey Scott McLeod, LUTC — National Producer #558629.
Questions? Contact Jeff@AnnuitiesExplained.org.
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