An annuity is a contract with an insurance company. You pay money in, and the company follows stated rules for growth, withdrawals, or income.
What it means
Some annuities are built mainly to provide a future income check. Others are built more like investments with insurance features.
Words such as immediate, deferred, fixed, indexed, and variable describe very different contracts. The word annuity alone tells you very little.
A simple example
One person gives an insurance company $200,000 in exchange for a monthly payment that can last for life. Another person puts $200,000 into a deferred annuity that may grow under the contract's rules before withdrawals begin. Both are annuities, but they solve different problems.
The first person is buying predictable income and may give up access to the lump sum. The second may keep more account value but face fees, limits, or surrender charges for taking money early. Before comparing quoted payments or growth rates, ask what is guaranteed, what can change, what happens at death, and what the salesperson earns.
What people often miss
Guarantees depend on the insurance company. Fees, surrender charges, income rules, and sales pay can be hard to compare.
A quoted income rate is not always the same as an investment return.
Three questions worth asking
- Which type of annuity is this?
- What are every fee and surrender charge?
- What happens at death, and what does the salesperson earn?
Checked against primary sources
This explanation was checked against the sources below. Rules and limits can change, so check the source before making a decision.
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