What is an annuity?

An annuity is a contract issued by an insurance company that can insure a steady stream of future income in exchange for a single premium payment or a series of premium payments.  As long-term financial vehicles that grow tax-deferred during the accumulation phase, annuities can help safeguard against the risk of an individual outliving their assets by providing periodic income payments that can be insured for life.

Why should you consider an annuity?

Annuities can help you generate retirement income.  That’s important because planning for retirement invariably comes down to one simple question: Will you have enough money to last the rest of your life?  

If you are like many individuals facing retirement, the question can be a real cause for concern, but you are not alone.  It is a predicament presently confronting millions of Baby Boomers, each with their own vision of what a successful retirement might be.

With company pensions increasingly a thing of yesteryear, you must depend on your retirement savings to supplement your Social Security income, but will your nest egg last as long as you do?   Annuities can help generate income, which is why many people are including them in their retirement strategy.

What are the types of annuities?

Deferred versus immediate annuities

A deferred annuity is characterized by an accumulation period, funded through either periodic premium payments or by a single, lump-sum payment. The assets accumulate tax-deferred and annuity payments are put off until a later date, at which time a payout option is selected.  

An immediate annuity is purchased with a single payment and is designed to generate an immediate stream of income.

Fixed versus variable annuities

Annuities that offer a guaranteed¹ rate of return for a set period of time are called "fixed annuities." In a "variable annuity," you are offered investment choices through a selection of "subaccounts" whose values will fluctuate over time. Consequently, the return on a variable annuity will depend on the investment performance of the subaccounts. The choice of a fixed or variable annuity usually depends on a person's specific needs and goals, as well as risk tolerance.  

Single payment versus flexible payment annuities

A single payment annuity is purchased with a single lump-sum payment at the inception of the contract. This means that the funding of this annuity is achieved with one payment. Flexible payment annuities are purchased with multiple payments.