A life insurance contract sold by insurance companies, brokers, and other institutions. It is usually sold as a retirement investment. An annuity is a long-term investment and can have steep surrender charges and penalties for withdrawal before the annuity's maturity date. (Annuities are not federally insured by the NCUSIF.)
Originally, an annuity simply meant an annual payment. That's why the retirement income you receive from a defined benefit plan each year, usually in monthly installments, is called a pension annuity.
But an annuity is also an insurance company product that's designed to allow you to accumulate tax-deferred assets that can be converted to a source of lifetime annual income.
When a deferred annuity is offered as part of a qualified plan, such as a traditional 401(k), 403(b), or tax-deferred annuity (TDA), you can contribute up to the annual limit and typically begin to take income from the annuity when you retire.
You can also buy a nonqualified deferred annuity contract on your own. With nonqualified annuities, there are no federal limits on annual contributions and no required withdrawals, though you may begin receiving income without penalty when you turn 59 1/2.
An immediate annuity, in contrast, is one you purchase with a lump sum when you are ready to begin receiving income, usually when you retire. The payouts begin right away and the annuity company promises the income will last your lifetime.
With all types of annuities, the guarantee of lifetime annuity income depends on the claims-paying ability of the company that sells the annuity contract.
An annuity is a contract with a life insurance company, though sometimes marketed through banks and financial planners. The investor (annuitant) pays a premium to the insurance company in either a single payment or a series of payments. In return, the insurance company makes payments to the investor, beginning at some future time, such as retirement or at a specified age. Tax-deferred investment income accumulates in the annuity. The two basic types of annuities are a fixed annuity and a variable annuity [see definitions of fixed annuity and variable annuity].
Fixed annuities: These annuities offer a specified rate of return that the issuing company guarantees. Individual investors have no direct financial interest in how the insurance company invests the premiums. Investors do have an interest in the insurance company in that if it becomes insolvent, they can lose their money.
Variable annuities: These annuities offer investors a limited series of options in which they can invest, typically mutual funds. Investors choose how their money is invested and receive a return based on the performance of the investments they choose.
- Browse Related Terms: Account balance, Accumulation period, Accumulation unit, Annuitant, Annuitization, Annuitize, Annuity, Annuity principal, Deferred annuity, Fixed annuity, Hybrid annuity, Immediate annuity, Income annuity, Life expectancy, Lump-Sum Distribution, Minimum required distribution (MRD), Nonqualified annuity, Split-funded annuity, Systematic withdrawal, Variable annuity, Withdrawal
A contract, usually issued by an insurance company, that generally provides for the accumulation of contributions and a guaranteed income paid at regular intervals, usually monthly, for a specified period of time or for life. Many annuity contracts have significant mortality charges.
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