What is an Annuity?

You may have heard a friend or colleague talk about annuities when discussing their retirement plans. But what exactly is an annuity? Below, we’ll explain what an annuity is, the different types available, and things to consider when looking for one for your future.


What Is An Annuity?

An annuity is a financial product that is sold by insurance companies. It’s essentially an agreement wherein the buyer makes a lump-sum payment or a series of payments. The insurer then agrees to disburse payments to you at a future date, typically during retirement years. These payments can be structured to last for a specific period or for the remainder of your life, depending on the terms of the contract.

Annuities: The Basics

Annuities are structured as a contract between the purchaser and an insurance company. The individual agrees to pay a set amount, either as a lump sum or in installments, to the insurance company. In exchange, the annuity provides regular payments to the individual at some point in the future.


Types of Annuities

You have several options to consider when it comes to annuities. Before deciding which is the best for you, we’ll review the features and advantages of each:

Immediate vs. Deferred Annuities

Immediate Annuities: With an immediate annuity, you make a single lump-sum payment to the insurance company, and they start making payments to you almost immediately. These are a common choice for retirees and those who want a steady stream of income right away.

Deferred Annuities: A deferred annuity, on the other hand, allows you to build up funds over time. The insurance company begins making payments to you at a predetermined date in the future. Deferred annuities are a common choice for those who are still active in their career and wish to set up a source of income for their later years.

Fixed vs. Variable Annuities

Fixed Annuities: Fixed Annuities provide a guaranteed interest rate and a fixed number of payments. Regardless of market fluctuations, you are assured a certain income from this type of annuity.

Variable Annuities: In a variable annuity, the payments you receive depend on the performance of investments chosen by you. This means that your income from the annuity may vary, offering potential for higher returns but also carrying more risk.

Benefits of Annuities

There are a range of benefits that annuities provide that make them a popular choice for those who want to be proactive and secure in the retirement:

Steady Income: One of the primary reasons people choose annuities is the promise of a steady income, especially during retirement. The payments from an annuity can act as a supplement to other retirement income such as pensions or social security.

Tax Deferral: The earnings from an annuity grow tax-deferred until you start receiving payments. This means you don’t pay taxes on the interest, dividends, or capital gains until you withdraw the money.

Flexibility in Investment: Annuities provide offer a range of investment options, particularly in the case of variable annuities. You are able to guide the success of the annuity by select the mutual fund(s) that align with your risk tolerance and financial goals.

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Is an Annuity Right for You?

The decision to invest in an annuity should align with your personal financial goals and capabilities. Annuities can be particularly beneficial for individuals who:

  1. Are concerned about having a steady income during retirement.
  2. Seek tax advantages associated with certain investments.
  3. Desire both growth and income in their financial planning.

However, annuities may not be the right choice for everyone. Annuities are best suited for those that have the money to fund them and are not intended for those with short-term financial needs. Annuities also come with penalties for withdrawing funds outside of the benefit schedule, so they are not a good choice for people who might require immediate access to their funds. Work with a reputable financial expert like Leverage before deciding if an annuity is right for you.


Key Takeaways

Annuities provide a reliable source of income, particularly during retirement, and can be customized to your individual needs. They provide stability and growth potential and play a key role in a well-rounded financial plan. Like all financial products, annuities should be considered carefully, fit in the context of your overall financial goals, and should be selected with the help of an expert.

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Last updated December 12, 2023

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