May 27, 2025
June is Annuity Awareness Month
What is an annuity?
As we step into June—Annuity Awareness Month—it’s the perfect time to revisit one of the most versatile tools in retirement planning: the annuity. By understanding how annuities work and the benefits such as tax-deferred growth and lifetime income, you can help your clients make informed decisions.
At its core, an annuity is a financial contract between an individual (or entity) and an insurance company. In exchange for premium payments, the insurance company agrees to provide a future income stream—either through withdrawals, annuitization, or as defined by a rider. Because of their long-term nature, annuities are commonly used as part of a retirement strategy.
Key Roles in an Annuity Contract
An annuity contract typically involves three roles:
- Owner: The person or entity (such as a trust, charity, or retirement plan) who funds the annuity and makes decisions about the contract.
- Annuitant: The individual whose life expectancy is used to calculate income payments. The annuitant may be the same as the owner or someone else.
- Beneficiary: The person who receives a death benefit if the annuity has remaining value upon the death of the owner or annuitant.
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For every type of annuity, the account growth is tax-deferred; meaning taxes are not paid until the money is withdrawn from the annuity.
Accessing Your Money
Annuities are designed as long-term financial tools. Most come with a surrender period, during which early withdrawals may incur surrender charges. However, many contracts allow 10% free withdrawals annually without penalty.
It’s important to note: Withdrawals before age 59½ may be subject to a 10% IRS early withdrawal penalty, regardless of the insurance company’s terms.
See the resources below for more information on the benefits of annuities.
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