What is an Annuity?
Annuities are contractually-executed, relatively low-risk investment products; the insured (usually an individual) pay a life insurance company a lump-sum premium at the start of the contract. That money is to be paid back to the insured in fixed, incremental amounts, over a future time period predetermined by the insured. The insurer invests the premium; the resulting profit, or return on investment, fund the payments received by the insured, and, compensate the insurer.
Conventional annuity contracts provide a predictable, guaranteed stream of future income (e.g., for retirement) until the death(s) of the beneficiary(s) named in the contract, or, until a future termination date – whichever occurs first. These financial instruments have been used to accumulate funds and provide significant and sudden increases in personal income (via future, lump-sum withdrawals), while legally avoiding taxes (e.g., income-, capital gains-, estate-) that would otherwise be governmentally assessed.
Immediate Annuities vs. Deferred Annuities
An Immediate Annuity is an insurance policy that, in exchange for a sum of money, guarantees that the issuer will make a series of payments. These payments may either be level, or increasing, periodic payments for a fixed term of years or for a lifetime.
A Deferred Annuity is a contract that is chiefly a vehicle for accumulating savings with a view to eventually distribute them either in the manner of an immediate annuity or as a lump-sum payment.