What are Annuities

What are Annuities? Definition of an annuity, main types of annuities and whether you should get them.

Definition Annuity

What is an annuity? An annuity is an investment contract between an individual and an insurance company. Annuities do not include any death benefit, and are essentially investment contracts. The main advantage of annuities is that they money earned on annuities is tax-deferred until it is withdrawn. Thus, annuities are similar to nondeductible IRAs and possibly 401(k)s.

However, you would be penalized for money withdrawals unless you wait until after the surrender period expires, and you are older than 59.5 years old.

What is an Annuity

Unlike insurance policies with monthly payments, annuities are purchased with a single lump-sum payment. Then, based on the type of annuity you purchase, insurance companies will guarantee you a minimum rate of return over the life of the contract. These guarantees build the perception that annuities are safe investment instruments.

Qualified or nonqualified?

If you invest into annuities with pretax money such as that in a 401(k), then you would be investing into qualified annuities. If you invest into annuities with money on which tax has already been paid, then you would be investing into nonqualified annuities.

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