What Is An Annuity?

An annuity is a contract in which an insurance company makes
a series of income payments at regular intervals in return for
a premium or premiums you have paid. Annuities are most
often bought for future retirement income. Only an annuity
can pay an income that can be guaranteed to last as long as you
live.

The word annuity is a Latin word. You can find it in the
oldest dictionary you have. Annuity means income. An annuity
is neither a life insurance nor health insurance policy. It is not
a savings account or savings certificate. You should not buy
an annuity to reach short term financial goals. There are several
different types of annuities. The word annuity of course means
income. The word deferred means income later. The word immediate
means income now. There are two types of annuities,
fixed and variable. The word fixed doesn't necessarily mean
your interest is fixed, it means your premium earns a minimum
guaranteed interest rate. Variable, which involves risk means
the dollars (your premium), you put into a variable annuity can
vary up and down.

There are two parts to a fixed deferred guaranteed income
annuity, a current interest rate and a minimum guaranteed interest
rate. The minimum guaranteed interest rate is the lowest rate that
your annuity will earn. This rate is stated in the contract. The current
rate is linked to the reserves and interest the company earns on their
portfolio, or for an external reference or index. You can buy a fixed
deferred annuity and start your interest income thirty days later.
However, it is better to wait twelve months, and then take the previous
years earned interest through the second year.

With an IRA, you can put your individual retirement account inside
of a fixed annuity, the only vehicle that can provide a guaranteed
retirement income to last you as long as you live. Insurance companies
are required by law to have reserves that back up the guarantee.