An annuity is a contract between the buyer and an insurance company. In general, the insurance company promises to do something with the buyer’s money -- like grow it or pay it out over a number of years. This page should serve as a general overview of annuities. After you understand the concept you can look into the various annuity types.
Annuity Key Terms
You’ll want to know some key terms when researching annuities. A few of the important ones are:- Contract Owner
- Annuitant (may be the contract owner)
- Premium
- Surrender Period – the number of years (if any) that you must keep your money in a specific contract without paying a penalty
- Beneficiary
- Annuitize
- Variable annuity
- Immediate vs deferred annuities
Advantages of Annuities
Annuities can be helpful in some situations. In general, some benefits are:- Tax-deferred growth and compounding within the annuity contract
- Guaranteed rates of return on your dollars
- Guaranteed lifetime payments if you annuitize (in some cases you don’t even have to annuitize in order to receive this benefit)
- Other features that may be important to you. These are various bells and whistles that do very specific things
Disadvantages of Annuities
- You have to pay for the guarantees somehow. If you don’t need them, don’t pay for them
- Some contracts have surrender periods that can tie up your money longer than you want
- IRS rules restrict how you take money out of an annuity. Distributions may be taxable and/or penalized
- Annuities can be overused in banks
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