What is an Annuity?
Annuities are relatively low-risk investment products; the insured has a contractual agreement with a life insurance company which is usually a lump-sum premium. The insured is paid back in fixed, incremental amounts, over some future time period. The insurance company will use the return on invested premiums to funding the payments to the insured and to compensate the insurer.
Traditional annuity contracts provide a predictable, guaranteed stream of f income that lasts until the death(s) of the beneficiaries(s) named in the contract, or, until a future termination date – whichever occurs first. Annuities have been used to accumulate funds and provide significant increases in personal income, all while legally avoiding income, capital gains and estate taxes that would otherwise be assessed on them.
Immediate Annuities vs. Deferred Annuities
An Immediate Annuity is an insurance policy which guarantees that the issuer will make a series of payments. Payments are either level or increasing periodic payments for a fixed term or until the ending of a life or two lives, or even whichever is longer. It is important to note that the owner or annuitant gives up control of the asset with an immediate annuity- there are no free withdrawals an no surrender period.
A Deferred Annuity is a contract that is used for accumulating savings with the objective to eventually distribute them either in the manner of an immediate annuity or as a lump-sum payment.