An annuity account is created with a contract between you and an insurance company in which you make a lump sum payment or series of payments and in return obtain regular disbursements beginning either immediately or at some point in the future. Annuities come in three main varieties – fixed, variable and indexed – each having their own level of risk and payout potential.
Many aspects of an annuity can be tailored to the specific needs of the recipient. The duration of the disbursements can also vary. You can choose to receive payments for a specific period of time – for example, 25 years or obtain them until your death. Of course, securing a lifetime of payments lowers the amount of each check, but it helps ensure that you don’t outlive your assets. An important feature to consider with any annuity is its tax treatment. While your balance grows tax free, disbursements are subject to income tax.
The goal of annuities is to provide a steady stream of income for a specified amount of time to the annuitant or beneficiary paid out on a regular basis, typically for the rest of their life. Interest accrues on a tax deferred basis. Annuities can be withdrawn without penalty after age 59 1/2. Surrender charges may apply for early withdrawals per terms of contract. Opening deposits to start an annuity account vary and can be low or substantial depending on the type of contract and return on investment.
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