What is an Annuity – Meaning, Definition, Benefits & Types

What Is An Annuity? Well, it’s a fixed sum of money paid to someone each year, typically for the rest of their life.

How do Annuities Work

An annuity is a type of financial investment sold by insurance companies. Earnings on annuities are tax-deferred, meaning you do not pay taxes on the money until you begin to receive payouts. Due to the fact that you are not yet paying taxes, your annuity grows more quickly (also taking into account the investments you’ve chosen). Annuity contracts guarantee a payout for a chosen length of time.

An Annuity

The initial investment should be a lump sum, generally $5,000 or more. If you choose, you can make periodic deposits into the annuity as long as you are not yet receiving payouts.

Annuities have two phasesAccumulation and Distribution. During the accumulation phase, you have already or are still depositing money into your annuity and it is invested. Your earnings are growing without being taxed. The distribution phase begins when you want to start receiving payouts.

Basics of Annuities

You can choose to receive a lump sum payout or choose to annuitize. Annuitizing means that you are choosing to receive monthly checks for a certain period of time or for life. When you receive money from your annuity, it is generally taxed as income.

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