Annuities

Annuities are essentially insurance policies with a twist. While life insurance pays a death benefit and protects from the risk of dying prematurely, annuities' distinction is that they can ensure a source of income for as long as a person lives; annuities protect one from the risk of outliving one's assets. The other attractive aspect of annuities is that their values grow on a tax-deferred basis. An annuity is an insurance contract and can be offered only by a licensed insurance agent.

There are two basic kinds of annuities.

• Fixed annuities are based on both guaranteed and current interest rates that are declared. The value of a fixed annuity can never fluctuate downward.
• Variable annuities build value based on the performance of the underlying investments in the fund, which are not guaranteed.

The values will fluctuate with market conditions. Annuities are popular with some people because they provide tax-deferred savings with guaranteed life-income options. Unless an annuity is part of an IRA or employer-sponsored, tax-qualified retirement plan, your contributions to it are not pre-tax or tax-deductible, so you may miss out on some of the tax savings offered by the other retirement plans. Such an annuity is called a "nonqualified annuity."

This article provided by The Educated Investor and powered by CalcXML.
© 2000-2008 Precision Information LLC. All rights reserved.
Click here to license this content.