How Do Annuities Work?
Annuities are financial products designed to provide a steady income stream, typically during retirement. They are structured contracts between an individual and an insurance company, wherein the individual makes a lump-sum payment or a series of payments in exchange for future cash flows.
Types of Annuities
- Fixed Annuities: Provides guaranteed payments, offering stability and predictability.
- Variable Annuities: Payments fluctuate based on the performance of underlying investments, allowing for growth potential but carrying more risk.
- Indexed Annuities: Returns are linked to a stock market index, combining features of fixed and variable annuities.
How Annuities Work
The process generally involves two phases:
- Accumulation Phase: The investor pays premiums into the annuity, which can grow on a tax-deferred basis.
- Distribution Phase: The annuity converts the accumulated funds into regular payouts, which can be structured over a certain period or for the lifetime of the annuitant.
Benefits and Considerations
Annuities can provide a reliable income source for retirees, but they come with fees and surrender charges. It's essential to review the terms and potential tax implications before investing in an annuity.