Annuities

An annuity describes a contract offered by an insurance company that allows you to accumulate funds for retirement on a tax-deferred basis. You pay an initial lump sum or on going "premium" to the insurance company and, in return, they promise to pay you an income stream - either immediately or at a later date. This income is guaranteed by the insurance company to last either a fixed number of years, or as long as you live.

Your value in an annuity contract equals the premiums you've paid in, plus interest credited, less any applicable charges.  The insurance company uses this value to calculate the amount of the benefits you'll receive from your annuity contract.

Annuities can have two phases:

1) Accumulation phase

2) Payout phase.

During the Accumulation phase, the money you put in the annuity earns interest on a tax-deferred basis (less any applicable charges). Because of this tax-deferral, your funds will grow faster than they would if taxes had to be paid annually on any gains.  Also, the longer you leave your funds in this Accumulation phase, the greater the impact this tax-deferred growth will have on annuity value.

During the second phase, called the Payout phase, the insurance company pays income to you, or anyone you designate. Unlike many other retirement savings instruments, you will have significant flexibility in how you receive your funds. For instance, you can choose to receive, say, a 10-year, 20-year, or even a lifetime payout of income based on your life expectancy.

There are two broad classes of annuities: Deferred annuities and Immediate annuities. "Deferred" and "Immediate" refer to how quickly the insurance company starts paying out the income stream. Each class has numerous sub- classes.