AnnuitiesAnnuities 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.
Guarantees are based upon the claims-paying ability of the issuing company.
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."