Annuities are a contract between you and an insurance company in which you make a lump-sum payment or a series of fixed payments to the insurance company in return for a future stream of payments back to you. They ordinarily have an accumulation phase during which money accrues inside the instrument, and an annuitization phase during which money begins to be paid out. In addition, annuities may come with a death benefit, entitling beneficiaries to receive a payment upon your death. Annuities also typically allow for tax-deferred growth of your earnings. That means you don't pay taxes on your earnings until the payments are made.
Common characteristics of all annuities include:
- You, the holder make a series of payments, usually monthly into the annuity. This is called the accumulation phase and could last between 10-90 years depending upon your age and when the annuity is opened.
- Your payments grow tax deferred within the annuity.
- At a certain point, the annuity begins to make payment back to you. The payments are the sum of what you have invested via your periodic payments and any appreciation.
- The funds are taxed as they are withdrawn.
- Many annuities pay a death benefit when you die.
Annuities comes in a number of different shapes and sizes, but can roughly be divided between fixed annuities and variable annuities.
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