ANNUITY 101

An annuity is a contract between you and an insurance company. You give the insurance company money one time, or over a period of years, and the company, in turn, promises to make regular payments to you over your lifetime, or for a certain period you specify.

Two types of annuities are available: immediate and deferred.

An immediate annuity will start making secure, guaranteed payments to you right away (usually within the first year of paying your premium). If you are still saving money for retirement, however, a deferred annuity is probably a better option for you. Deferred annuities enable you to grow your money through tax-deferred interest accumulation over a period of time before they begin paying you. After the accumulation period (usually 1, 5, or 10 years), the insurance company will begin making payments to you based on the income option you selected.

And tax-deferred annuities offer important benefits not found in in other tax-qualified accounts (such as IRAs and 401(k) plans): first, there is no limit to the amount of money you may contribute to an annuity; and second, annuities guarantee that upon the death of the investor, his or her beneficiary will receive either the annuity's market value or at least the amount of the original investment.

Should You Buy an Annuity?

The answer depends on your individual circumstances. Do you have money to invest as a result of an inheritance, a pension plan or the sale of a home or business? Do you have a bank CD or money market account that is no longer generating competitive yields? Do you have more money available now that your children are grown? If any of these situations apply to you, a tax-deferred annuity can be a smart way to turn your money into a steady stream of retirement income you can count on for as long as you live.

Many people today use annuities as part of their overall financial plan instead of savings accounts and certificates of deposit because their tax-deferred money can grow and compound faster over a shorter period of time. "Tax-deferred" means that the earnings are not taxed until distributed either in a withdrawal or in annuity payments. Even then, the amount you contribute to the policy is not taxable.

See below for which annuity is right for you, and also our Annuity Glossary.

Which Annuity is Right for You?

If you are near retirement and/or wish to turn your 401(k), IRA, or sale of a home into a secure, guaranteed income stream, an Immediate Annuity might be right for you.

On the other hand, if you are still saving for retirement and want to grow your money with the power of tax-deferred compound interest, consider the following deferred annuities:
Fixed Annuity
CD-Type Annuity
Equity Indexed Annuity
Variable Annuity

More about Annuities:

We want you to make the most informed decision possible when planning your personal finances. Below you will find financial calculators to help you determine how much to save tax deferred to generate a certain future income. Informative articles, government links and other helpful resources are also here for your convenience.

Retirement Calculators:

Use our easy retirement calculator to estimate the annual annuity investment necessary to reach your retirement income goals.

If you're wondering how well a tax-deferred annuity may perform against a taxable account (such as a bank CD), try our account comparison calculator.

Featured Articles:

See our complete Library of Annuity Articles, or choose from the following:

Annuities: A Retirement Plan with Better Benefits
Fixed Annuity: A Solid Return in a Down Market
Retirement Planning: How do Annuities fit in?
Survey Shows: Half of Baby Boomers Have Neglected Their Retirement Plans
Survey finds: American Women are Unprepared for Retirement

Government Resources:

Because annuities are issued by insurance companies, the regulations that govern the insurance industry apply to them as well. Each state has a department or division of insurance which monitors the industry.

State Departments of Insurance Regulators

Furthermore, under variable annuity contracts, the owner can generally allocate the purchase payments among several types of investment portfolios or mutual funds and the contract value is determined by the performance of those investments. Accordingly, variable annuity contracts require that you review a prospectus before investing money, and are regulated by the U.S. Securities and Exchange Commission.