Annuities are financial products that provide a steady stream of income over a specified period or for the remainder of a person's life. They are typically offered by insurance companies and can serve as a means of long-term financial planning, particularly for retirement.
Annuities are structured as contracts between an individual and an insurance company, where the individual makes either a lump sum payment or a series of payments to the insurer. They offer the benefit of tax-deferred growth, meaning that earnings within the annuity account are not taxed until withdrawals get made.
There are different types of annuities, including fixed annuities, variable annuities, and indexed annuities, each with its own features and investment options. Fixed annuities provide a guaranteed rate of return and a fixed income stream, while variable annuities allow the investor to choose from a range of investment options. Indexed annuities provide returns based on the performance of a specific market index, offering a potential for higher returns while protecting against market downturns.
Annuities often come with fees and expenses, including mortality and expense charges, administrative fees, and investment management fees, which can vary depending on the specific annuity contract. They can be either immediate, where income payments start immediately after purchase, or deferred, where income payments are postponed until a later date. Withdrawals from annuities before reaching a certain age (typically 59 1/2) may be subject to penalties and taxes.
Annuities can offer a reliable income stream during retirement, providing financial security, but it's essential to carefully consider the terms, fees, and features before purchasing an annuity to ensure it aligns with individual financial goals and circumstances.