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.
Fixed Annuity
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.
Indexed Annuity
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.
Variable Annuity
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.