What is an Annuity?

An annuity is an investment product often used as part of a retirement plan or other long-term financial goal. Annuities can be a good choice for individuals wanting a low or minimal risk investment. One of the best things about annuities is that they guarantee income for a specific period of time or income for the rest of a person’s life. Unlike the stock market and mutual funds, annuities are a more stable investment. Although no investment is suitable for everyone, annuities have a place in investment portfolios.

Annuity Advantages

Another advantage of annuities is the range of options available. A person can choose between a fixed, indexed or variable annuity based on their stage in life with a focus on balancing risk and growth. With Fixed annuities principal and the earnings are guaranteed by the insurance company. On the other hand, insurance companies mostly will guarantee only the principal in indexed annuities, while earnings are based on the performance of the underlying index. In variable annuities both principal and earnings are tied to the underlying sub-accounts that are investments in funds of various types and risks.

There are also important tax advantages to annuities. Most offer tax-deferred growth on any earnings generated. This means the owner pays no taxes until distributions begin, usually after age 59½. Withdrawals before that age can result in tax penalties and surrender charges. Annuity payouts are generally taxed as ordinary income; however, while qualified annuity payouts are taxed on the full amount, non-qualified payouts are taxed only on the earnings part.

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