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
What are the benefits of an annuity?
Annuities provide three main benefits:
- Death benefits: The basic death benefit offers a guarantee that when you die, the insurer - at a minimum - will pay out the amount you paid in.
- Living benefits: People often buy annuities with retirement in mind, because annuities can pay out in lump-sum amounts or provide a guaranteed income for as long as they live.
- Tax deferral: You aren't taxed on any interest, dividends or capital gains that accumulate inside of your annuity contract until you take a withdrawal. However, if you withdraw money prior to age 59 1/2, you may be subject to an additional 10% penalty tax.