An annuity is an agreement or contract between you the buyer and an insurance company. Put simply, you pay money to an annuity issuer, and the issuer then pays the principal and earnings back to you or to a named beneficiary. Annuities are generally used to provide income in retirement.
One major advantage is your money grows tax deferred until age 59 ½. Like may tax deferred investments expect to pays a 10 % penalty to your friends the IRS should you withdraw your money early.
Almost all insurance companies sell annuities. You can pay the insurance company all at once or incrementally. The type of annuity you own determines whether your money earns a fixed amount or an amount that depends on the equities in which the annuity is invested. At a chosen time , known at the maturity date, the insurance company generally begins to send you regular distributions from the annuity’s account. You can withdraw your money incrementally over time or in a lump sum.
Most people work with a company to set up an annuity. The annuitant can either invest in installments, or purchase an annuity with a lump sum. Unlike life insurance, an annuity does not require a physical assessment and is used to fund the individual during his or her lifetime, rather than surviving children or partners, except in certain circumstances. When the annuity is established, the annuitant signs a contract which outlines the exact terms of the annuity, including the length of time that it covers and whether or not it will be fixed.