Frequently Asked Questions About Annuities

Q: What is a fixed annuity?

An annuity is a contract between a contract owner and an insurance company in which the insurer agrees to make periodic payments in exchange for a premium.

Q: How does a fixed annuity work?

An annuity is a contract between a contract owner and a life insurance company. The annuitys value is backed by the financial strength and claims-paying ability of the issuing insurance company. 
As the contract owner, you pay a premium to the insurance company. In exchange for your premium, the insurance company promises to make payments to you at some point in the future. You may also receive the benefits as outlined below.

You should not buy an annuity for short-term purposes. You generally have to keep your premium in the annuity for a specified period of time (with the exception of immediate annuities) to avoid the assessment of penalties, such as surrender charges.

Q: What are the benefits of fixed annuities?

Annuities offer benefits that help people establish a guaranteed retirement income stream. The wide range of annuity choices allows people to select those that are best suited to meet their financial goals. Fixed annuities protect the principal and offer minimum interest rate guarantees. Other annuities, such as fixed index annuities provide a combination of minimum interest rate guarantees and the potential for earnings based on a market index. Interest earned on a fixed index annuity is subject to a cap and could be less than the interest earned in a traditional fixed annuity.

Q: How are annuities taxed?

Prior to purchasing an annuity, you should consult with a tax professional to discuss your individual situation. In general, income tax on annuities is deferred, which means you arent taxed on the earnings until you begin to take money out of the annuity, at which time they are taxed as ordinary income. You may also have to pay a 10% federal tax penalty if you withdraw any of the accumulation value prior to age 59 1/2.

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This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice to your situtation.