Annuities - The Basics

Annuity – What is an Annuity?

In its simplest definition, an annuity is an amount that is payable annually.  More specifically, an annuity describes a contract offered by insurance companies that allows you to accumulate funds for retirement on a tax-favored basis, and then receive an income that can be guaranteed to last as long as you live.

An annuity is neither a life insurance nor a health insurance policy.  It is not a savings account or a savings certificate.  You should not buy an annuity to reach short-term financial goals.  An annuity is a retirement planning tool.  Your value in an annuity contract equals the premiums you have paid, less any applicable charges, plus interest credited.  The insurance company uses the value to figure the amount of most of the benefits that you can choose to receive from any annuity contract.

Annuities have several benefits including: providing tax deferred income, avoidance of probate (meaning the proceeds of the annuity can be passed directly to your beneficiary at the time of your death), providing you with a guaranteed income stream for live, and offering a variety of annuity types and payout options.  However, annuities present complex issues regarding taxes, fees, and withdrawal strategies that may not make them the best investment choice for you. Consider discussing this type of investment first with a financial planner and your tax advisor.

Annuities – How do they 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.  An annuity has two parts or periods:

• Accumulation period


• Payout period