Annuities are the only investment vehicles that can guarantee investors that they will not outlive their income, and they do this in a tax-favored manner. In addition, annuities are available with a host of features to meet a wide variety of investor needs. Below is a brief description of the various types of annuities that are available.
Accumulation and Payout Phases
Technically, annuities are contracts providing for the systematic liquidation of principal and interest in the form of a series of payments over time. However, this really refers to the payout phase of an annuity; in point of fact, annuities can (and often do) have an accumulation phase that also lasts for a substantial period of time.
An annuity is established when an investor makes a cash payment to an insurance company, which invests the money. This may be a single large cash payment or a series of periodic payments over time. During the accumulation phase the money remains invested with the insurance company and is periodically credited with some growth factor. In return for making the deposit(s) into the annuity, the insurance company ultimately agrees to pay the owner(s) a specified amount of payments periodically, beginning on a specified date. This is the payout phase of the annuity.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM