An annuity is a contract between one or more individuals and an insurance company.

An annuity can provide a stream of income that the holder cannot outlive or provide tax-deferred growth for those not yet ready to take income. These unique attributes make it especially attractive as an asset to fund retirement. Investment gains inside annuities accumulate and compound tax-deferred – a highly advantageous characteristic. In some states, money held in annuities is exempt from creditors. Withdrawals from an annuity made by individuals younger than age 59 ½ are subject to a 10% penalty levied by the IRS. Annuities sometimes carry surrender charges that penalize early withdrawals above the level specified in the annuity contract. The investment-gain component of an annuity distribution is taxed as ordinary income.

Although annuities are investment contracts rather than insurance policies, they typically contain insurance features such as death benefits and minimum guarantees.

Immediate Annuities

Immediate annuities are types of annuities that provide income to the holder(s) – in the form of disbursements called distributions – soon after payment is received by the insurance company. The payment is made in a single lump sum.

A typical buyer of an immediate annuity is a retiree who uses his or her accumulated savings to purchase an annuity to provide a supplemental income stream.

Deferred Annuities

Deferred annuities are types of annuities that are purchased with a lump sum or regular, periodic payments lasting for years. The payments are compiled and invested by the insurance company; this interval of payment and investment is called the accumulation period. Distributions begin only at the conclusion of the accumulation period. Unlike immediate annuities, deferred annuities allow the holder(s) to save for retirement rather than being forced to purchase the annuity at once.

Fixed Annuities

A fixed deferred annuity is a type of annuity that pays a fixed, guaranteed rate of interest for an initial part of the accumulation period. Subsequently, the fixed rate may change in accordance with market conditions. There will be a minimum guaranteed rate. A death benefit feature is available.

A fixed annuity is commonly purchased at or near retirement and is comparable to a high-grade fixed-income security in its risk/return characteristics.

Variable Annuities

Deferred variable annuities are a type of annuity whose credited return varies according to the investment performance of a portfolio selected by the holder(s). Investment vehicles include equity mutual funds, bond funds and money-market funds. Variable annuities also include options and riders embodying minimum guarantees for returns, income and withdrawals. A variable annuity is a security whose issue is accompanied by a prospectus.

Variable annuities are suitable for individuals wishing to expose their money to stock, bond, real estate and commodity assets through the use of mutual fund sub-accounts.

Indexed Annuities

Indexed annuities are a type of annuity whose credited interest rate is tied to an index of economic performance, usually an equity index like the Standard & Poor’s 500. Indexing allows the annuity holder to participate in market gains, up to a threshold, while limiting fluctuations in value to changes in a broad index. Indexed annuities contain minimum guarantees for credited interest and income. They limit the degree to which changes in the index cause changes in the credited interest rate and also specify the time periods used to calculate index changes.

Indexed annuities are a hybrid of fixed and variable annuities, but closer to the former in the risk/return spectrum.

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what Annuity is right for you.