Annuity
An annuity is an insurance contract that provides a stream of income payments, typically for retirement, in exchange for an initial lump sum or series of payments.
🎬 Video Explanation
Exam Tip
Variable annuity = securities product (needs licenses). Fixed annuity = insurance only.
What is an Annuity?
An annuity is a contract between you and an insurance company. You pay a lump sum or series of payments, and in return, the insurer provides regular income payments, either immediately or in the future.
Types of Annuities
| Type | How It Works | Risk Level |
|---|---|---|
| Fixed Annuity | Guaranteed interest rate | Low |
| Variable Annuity | Returns based on investments | Higher |
| Indexed Annuity | Tied to market index with floor | Medium |
| Immediate Annuity | Payments start right away | Varies |
| Deferred Annuity | Payments start later | Varies |
Annuity Phases
- Accumulation Phase - You pay premiums, account grows tax-deferred
- Annuitization Phase - You receive income payments
Payout Options
| Option | Description |
|---|---|
| Life Only | Payments for your lifetime only |
| Life with Period Certain | Payments for life, minimum guaranteed period |
| Joint and Survivor | Payments continue for surviving spouse |
| Period Certain | Payments for fixed period (10, 20 years) |
Tax Treatment
- Tax-deferred growth during accumulation
- Earnings taxed as ordinary income when withdrawn
- 10% penalty if withdrawn before 59 1/2
- No contribution limits (unlike IRAs/401ks)
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