Annuities are contracted between one or more individuals and an insurance company. In exchange for payment, the insurance company agrees to provide regular, periodic income to the individual(s).
An annuity can provide a stream of income that the holder cannot outlive. This unique attribute makes it especially attractive as an asset to fund retirement. Investment gains accumulate and compound tax-deferred – a highly advantageous characteristic. Withdrawals from an annuity made by individuals younger than age 59 ½ are subject to a 10% penalty levied by the IRS. Annuities normally carry surrender charges that penalize early withdrawals above the level specified in the annuity contract. The investment-gain component of an annuity distribution is taxed as ordinary income.
Although annuities are investment contracts rather than insurance policies, they typically contain insurance features such as death benefits and minimum guarantees.
The various types of Annuities include: