Annuities work by the insurance company taking your premium in a lump sum or series of payments, investing it, and crediting you with a fixed and/or variable interest rate during what is called the accumulation period. The insurance company then pays the premium and interest back out to you in payment installments during what is called the annuity period. These annuity payments to you can be for a set period of time or for life.
Annuities do not have medical requirements, are flexible due to having many options in how they are structured, and the growth in an annuity is generally tax deferred until it is payed out during the annuity period.
Syndicated Financial Columnist, Host of the weekly talk show Steve Savant's Money, the Name of the Game, Scottsdale Arizona
There are a variety of tax deferred annuities that have a diversity of crediting methods: interest rates, indices and separate sub accounts. Annuity companies establish a profit margin or spreads from the earnings generated from the crediting method. The accounts accumulate tax deferred and distribution of non-qualified annuities are taxed as ordinary income on policy gain and the return of basis tax free. Qualified annuity distributions are completely taxable as oridanry income, i.e. no basis.
Different types of annuities work in different ways, but the gist of an annuity is that you pay an insurance company some money, they grow it on a tax deferred basis, and pay it back to you. You can pay or collect the money in a lump sum or at regular intervals; the payments may be guaranteed or variable; the annuity may be set up for a set period of time or for a lifetime; or other features. However, the basic premise is as described.
That is a great question! To put it very simply : you put a sum of money into an account that cannot be touched for a number of years. While it is stashed away, it is generating interest at an agreed upon rate. After a set number of years, the annuity begins to pay out an agreed upon sum, for an agreed upon period of time. That is a very simple explanation, and there are annuities that differ from how I described it, but that is your basic annuity in a nutshell. They are a way to structure steady payments to supplement an income in your retirement. If you have problems with cash flow, or don't have a good sum to invest, this may not be a good way to go for you. But if you can set aside a chunk for awhile, there are some really good annuities out there that can be a very good part of a retirement plan. I hope that helps, thanks for asking!
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
In an annuity the company exchanges a sum of money for a lifetime of income. This basic contract is called a single premium immediate annuity. Every other annuity is a modification of this plan. Deferred annuities allow you to contribute towards an annuity over a period of years. During the accumulation phase, increases in value are not taxed until the contract starts to make payments. Every objection about annuities has been met with a new form of annuity until there is quite possibly something for everyone.
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Annuities do not have medical requirements, are flexible due to having many options in how they are structured, and the growth in an annuity is generally tax deferred until it is payed out during the annuity period.