An annuity is simply a financial contract between a buyer or annuitant and an issuer or seller (typically an insurance company) whereby the buyer makes a lump sum payment or series of payments to issuer in exchange for regular disbursements beginning either immediately or at some point in the future.
The primary goal of an annuity is to provide consistent, steady income during retirement to help supplement social security, pension, 401k, and other sources of retirement income. Earnings on an annuity grow on a tax-deferred basis and can only be withdrawn without penalty after the annuitant turns 59 1/2.
Many aspects of an annuity can be tailored to the specific needs of the recipient. In addition to choosing between a lump sum payment or a series of payments to the insurer, you can choose when you want to annuitize your contributions – that is, start receiving payments. An annuity that begins paying out immediately is referred to as an immediate annuity, while those that start at a preset date in the future are called deferred annuities.
There are three primary types of annuities – fixed, variable and indexed. Each type of annuity has its own risk and payout potential.
There are three major types of annuities: fixed, variable, and indexed annuities.