What is an annuity?

It’s an insurance product you buy to save a significant amount of money and it offers a way to reduce taxes, and/or ensure a steady flow of income.

It's a contract between you and an insurance company. People buy annuities if they:

  • Need to save significantly
  • Want an investment that reduces taxes
  • Want to ensure a steady flow of income

How annuities work

  • You pay either a single premium or make payments for a set period of time in exchange for a future income.
  • They should increase in value and be income-tax free.
  • You can request to receive payments in a lump sum or in periodic fixed amounts.
  • A popular payout option is "lifetime income with 10 years certain." This means the annuity pays a monthly income for the life of the annuitant or for 10 years, whichever is longer.    

Updated 03/27/2014

See also

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