Hand Holding Annuity

What Is An Annuity?

An annuity is a contract between you and a life insurance company in which you pay a sum of money (either immediately or over a period of years), in return for a series of payments over a specified period of time. The sum is allowed to grow tax-deferred and is then distributed through a stream of payments. Annuities may be either immediate or deferred. Today, annuities come in many varied types and sizes. While annuities are still frequently utilized to provide a stream of income over one's retirement years, they now fulfill several other purposes, as well.

There are four parties to every annuity contract:

  1. The insurer: The insurance company providing the annuity contract.
  2. The owner: The person or entity that owns the annuity. Typically, this is the individual who made the purchase.
  3. The annuitant: The person whose life is the "measuring life" of the annuity contract.
  4. The beneficiary(ies): The person(s) who receive the benefit from the annuity following the death of the annuitant.

Often, the purchaser will name him or herself as the owner and annuitant, with a child or other heir as the beneficiary.

Annuities provide a number of benefits to the consumer. In addition to their tax-deferred status, annuities do not have a limit to the amount you may contribute each year.Some annuities do, however, contain certain contribution restrictions in that, in order to make contributions above a certain dollar amount in a given year, the insurer's approval must be sought. By contrast, IRAs and qualified plans contain contribution limits. Additionally, annuities are not subjected to many of the various fees that mutual funds charge. Thus, annuities work nicely in conjunction with retirement plans for those who have maximized their contributions.

Most annuities also have a guaranteed death benefit, ensuring the safety of the principal placed in the annuity. This feature is often appealing to elderly clients who seek a high degree of security in their investments, especially those who have seen their investment values drop in the stock market. Annuities have flexible distribution options, allowing payment in a lump sum, for a period of years, over a lifetime, or over joint lifetimes. Finally, from an estate planning perspective, annuities avoid the lengthy and costly probate process sometimes associated with administering a will.

This Web site is intended for general information purposes only. It does not nor is it intended to constitute legal, tax or investment advice. Alliance America is not a lawyer, registered investment advisor or investment advisor representative, and is not engaged in the practice of law or the business of investment advice.