Annuities are contracts sold by insurance companies and financial institutions where the funds are invested with the goal of paying out a fixed income stream in the future.
They are mainly used for retirement purposes and help individuals address the risk of outliving their savings.
- Annuities are insurance contracts that promise to pay you regular income immediately or in the future—the latter is known as a deferred annuity.
- You can buy an annuity with a lump sum or a series of payments.
- Annuities come in three main varieties—fixed, variable, and indexed—each with its own level of risk and payout potential.
- The income you receive from an annuity is generally taxed at regular income tax rates, not long-term capital gains rates, which are usually lower. However, check with a tax accountant or the Internal Revenue Service (IRS) for more information.
The following is basic information regarding the different types of annuities. For more information, please contact Consumer Affairs directly.
A fixed annuity is a type of insurance contract that promises to pay the buyer a specific, guaranteed interest rate on their contributions to the account. Fixed annuities are often used in retirement planning.
An indexed annuity is a type of annuity contract that pays an interest rate based on the performance of a specified market index, such as the S&P 500. Indexed annuities differ from fixed annuities, which pay a fixed rate of interest. Indexed annuities are sometimes referred to as equity-indexed or fixed-indexed annuities.
A variable annuity is a type of annuity contract, of which the value can vary based on the performance of an underlying portfolio of mutual funds.
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