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What is an Annuity?
In its simplest definition, an annuity is an amount payable annually. More specifically, an annuity describes a contract offered by insurance companies which allows you to accumulate funds for retirement on a tax-favored basis and then, if you choose, receive a guaranteed income payable for life or for a period certain such as five or ten years. Usually, the payments are made monthly, but many companies offer to make the payments quarterly, semi-annually, or annually if you so desire.
How does an annuity work?
An annuity is a vehicle for accumulating retirement savings in that you pay a premium to an insurance company and they promise to pay you interest. Unlike other retirement savings instruments, as long as you keep your monies with the insurance company, you are not required to pay income tax on your gains. This is what is known as 'tax deferral.' Only when you decide to withdraw your funds are your gains subject to income tax. An annuity also differs from other retirement savings instruments in another significant way. When you decide to withdraw your funds, the insurance company will give you the option to receive a guaranteed income for as long as you live.
(C) 2004 American Equity Investment Life Insurance Company http://www.american-equity.com/ |
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Life Insurance 
