Annuity
An annuity is a contract between an individual (the insured) and a life insurance company designed as a relatively low-risk investment product. The insured makes an upfront payment, known as a premium, to the insurance company. In return, the insurer provides a steady stream of payments back to the insured over a specified period, determined by the contract.
The insurer invests the premium to generate returns, which fund the payments to the insured and cover the company’s operational costs.
Annuities are commonly used to secure a guaranteed income for retirement or to accumulate wealth while legally minimizing taxes such as income tax, capital gains tax, or estate tax. They can provide consistent income until a specified termination date or the death of the named beneficiary.
Types of Annuities: Immediate vs. Deferred
Immediate Annuities
An immediate annuity starts providing payments soon after the premium is paid. In exchange for a lump sum, the insurer guarantees periodic payments that can either remain fixed or increase over time. These payments may continue for a specified number of years, for the lifetime of the insured (or joint lives), or whichever lasts longer.
Deferred Annuities
A deferred annuity focuses on savings growth. During the accumulation phase, the premium grows tax-deferred. At a future date, the insured can choose to convert the savings into periodic payments, as with an immediate annuity, or withdraw the funds as a lump sum.
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