Annuity

An annuity is a contract issued by an insurance company that promises to make a series of payments to the purchaser, the annuitant, starting at a defined time and for a defined period. Annuities are designed to provide a steady income stream, often to support retirement or wealth transfer, and they can be funded by a lump sum or by periodic payments.

Annuities are commonly categorized by timing and by how payments are determined. Immediate annuities begin payments soon after purchase, while deferred annuities accumulate value and begin payments later. Fixed annuities guarantee a level payment, whereas variable annuities provide payments that vary with the performance of underlying investments. Indexed annuities credit returns based on a market index with a guaranteed minimum.

Tax treatment varies by jurisdiction, but in many systems earnings on annuities grow tax-deferred until withdrawal. Withdrawals are generally taxed as ordinary income, and early withdrawals before a specified age may incur penalties. Fees, surrender charges, and rider costs can affect overall returns, especially in the early years.

Guarantees and risks differ by type. Fixed annuities offer principal protection but may have caps on credited interest. Variable annuities expose the purchaser to investment risk and typically carry higher fees. Some contracts include riders such as death benefits or living benefits, but these add to cost and complexity.

Payout options include life annuities, which aim to pay for the annuitant’s lifetime, and guarantees such as period-certain or joint-and-survivor arrangements. Annuities are used for retirement income, estate planning, or wealth transfer, and are typically offered through insurance companies with state-level regulatory oversight.