What Is an Annuity?

The term annuity seems to have many different reactions and responses depending on what people have read or heard. However, at its most basic level, an annuity is a financial contract between an insurance company and someone or something. The contract is an agreement to pay premiums in exchange for the insurance company providing a future income stream. This is either through withdrawals, annuitization or defined by a rider. Annuities are often used for a retirement strategy due to their long-term nature. In this article, we will take a deeper dive into what is an annuity:

Who Can Set-Up an Annuity?

An annuity policy is comprised of an owner, annuitant, and beneficiary.  The owner is the person responsible for making decisions about the policy and paying the premium.  An owner of an annuity is typically an individual but could also be a retirement plan, trust, charity, or organization.

What about the annuitant and beneficiary?

The annuitant is the person who the insurance company’s measure of life, the death of the annuitant triggers a death benefit, or their age is used to calculate income payments. The annuitant could be the same as the owner or different.

The beneficiary is a person who will receive a death benefit payout, if there is an account value, when the owner/annuity passes away.

How does an annuity grow?

There are numerous types of annuities; fixed, variable, and fixed indexed.  All of these annuities offer the same contract structure but vary on how the premium grows. Let’s look at how these three types of annuities grow,

For every type of annuity, the account growth is tax-deferred; meaning taxes are not paid until the money is withdrawn from the annuity.

What if I need to access my money?

Annuities have a gradually decreasing percentage of charges, surrender charges, that will be incurred if the policy is surrendered before the agreed upon term is over. Annuities can have varying surrender schedules. However, most annuities offer the client the ability to take 10% free withdrawals every contract anniversary.

As annuities are designed to be a long-term solution designed for retirement, withdrawals prior to 59 ½ could be subject to the IRS early withdrawal penalty, which overrides any carrier’s contractual provisions.

In summary, annuities can be a valuable tool in a comprehensive retirement strategy. By understanding how annuities work and the benefits such as tax-deferred growth and lifetime income you can help your clients make informed decisions.