In an annuity arrangement, money given to (most often) a life insurance company to grow on a tax-deferred basis. It’s then distributed back to the owner. Annuities are used to guarantee distribution of income for the entire life of the person or persons named in the annuity contract.
Many annuity customers today, however, use annuities only to grow invested funds and take lump-sum withdrawals as needed, rather than space out distributions for life.
Since insurance companies are regulated by the states, it’s important to understand that some options that are available in some states may not be available in others.
Annuities generally have two phases. The deferral phase is the time during which money is deposited and grows. In the annuity (or income) phase, customers receive payments for a period of time (the insurance company makes income payments that may be set for a predetermined period of time, or continue until the death of the customer(s) named in the contract).
Annuity contracts with a deferral phase always have an annuity phase. These annuities are called Deferred Annuities — a vehicle for accumulating savings in which any increase in account values is not taxed until those gains are withdrawn. This is also known as tax-deferred growth.
A deferred annuity that grows by interest rate earnings alone is called a Fixed Deferred Annuity.
An Indexed Annuity is regulated and distributed in the same manner as a fixed annuity and is a moderately conservative place for retirement dollars. Indexed annuities have a potentially higher upside, based on the performance of an outside stock index (such as the S&P 500) and have a floor of zero, so a consumer's money is always protected from market downturns.
A deferred annuity whose value fluctuates with the value of the stock or bond funds itÕs associated with, and for which the account value is not guaranteed to stay above the initial amount invested is called a Variable Annuity.
An immediate annuity is structured so that it has only the annuity phase. It is a vehicle for distributing savings tax-deferred, similar to a pension fund..