What is an annuity?

An annuity is a financial vehicle providing additional retirement income on a tax-deferred basis.

Every employee can purchase an individual annuity which will guarantee them regular financial resources, in addition to the Social Security benefits and any benefits provided by their employers' retirement plans.

Why Purchase an Individual Annuity?

The purpose of an annuity is to provide a lifetime income, typically for retirement, that the annuitant, or the insured, cannot outlive. Therefore, anyone who wants to make sure that they have sufficient funds when they retire will benefit from purchasing an individual annuity. This is particularly valid for people whose standard of living cannot be covered by Social Security benefits alone, or whose employers do not offer any retirement plans.

Differences and Similarities between Annuities and Life Insurance

Whereas life insurance provides protection against dying prematurely before the accumulation of a sufficient amount of resources, an annuity protects the annuitant against living too long and exhausting one's financial resources while one is alive. Thus, we can conclude that an annuity is the opposite to life insurance.

However, there are certain similarities between these two products. Just like life insurance policies, you can buy an annuity from a life insurance company. The other significant feature that an annuity and a life insurance policy share, is that risk is transferred from the consumer to the insurer, the only difference being that with annuities, the risk transferred is the risk of outliving one's assets.

Annuity Options

The annuitant has several options concerning the distribution and payment of the savings.

Accumulation period: the majority of annuities have a savings account which earns interest on the principal and builds up on an annual basis. Depending on the type of annuity, the insurance company can either provide a guaranteed minimum rate of return, or a variable, non-guaranteed interest rate. In both case, the interest earned is not subject to tax.

Annuity period: it is the period when the annuitant begins receiving installment payments. The annuity period typically starts when the annuitant reaches a certain age specified in the annuity contract.

• How do annuities work?
• What is a Roth IRA?
• How does a joint and survivor annuity work?
• What happens to a variable annuity death benefit when the annuitant dies?
• Is it worth investing in a non-deductible IRA?