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What are Annuities?

Annuities are insurance products that provide long-term income through a stream of future payments. While investment annuities save money for retirement and beneficiaries, structured settlement annuities stem from personal-injury legal cases, wrongful-death claims or lottery payouts. When unexpected circumstances arise and require immediate funds, you can sell these payments for a lump sum of cash. There are many benefits to these investment products, which is why people planning for retirement, those who win the lottery and recipients of personal injury structured settlements use annuities most frequently. Some of those benefits include:

  • Long-term security
  • Tax-sheltered growth
  • Safe and reliable investment
  • Account for longevity
  • Avoid probate
  • Adjust to inflation
  • Care for beneficiaries
  • Structure payments around planned expenses
  • Maintain an affordable retirement lifestyle

Is an Annuity Right for Me?

Choosing to fund an annuity can be a personal decision. Discuss with your spouse or loved one before making this decision. It is also suggested that annuitants consult with an accountant or attorney before making this decision. There are two basic types of annuities: deferred and immediate. With a deferred annuity, your money is invested for a period of time until you are ready to begin taking withdrawals, typically in retirement. If you opt for an immediate annuity you begin to receive payments soon after you make your initial investment. For example, you might consider purchasing an immediate annuity as you approach retirement age. The deferred annuity accumulates money while the immediate annuity pays out. Deferred annuities can also be converted into immediate annuities when the owner wants to start collecting payments. Within these two categories, annuities can also be either fixed or variable, depending on whether the payout is a fixed sum, tied to the performance of the overall market or group of investments, or a combination of the two. Consider these questions when talking with your financial advisor:

  • What kind of annuity is right for me?
  • Have I made maximum contributions to other retirement plans?
  • Am I using a highly rated insurance company to buy my annuity?
  • What is the cost? Are there any fees?
  • Will I need my money sooner than 59 ½ years old?
  • Who do I want to leave my assets to?

Becoming an Annuity Owner

If you believe an annuity would be a good investment for you and your family, there are several easy steps to follow to get one:

  • Find a Company and Finalize Your Contract – There are a variety of brokers, insurance companies and banks that issue annuities. Look at ratings from Fitch, Standard & Poor’s, AM Best and Moody’s to ensure you choose a reputable company.
  • Purchase Your Annuity – An annuity is purchased in one of two ways: as a lump sum or with premiums.
    • Lump Sum Payment – For this transaction, an annuity issuer would accept one large payment in exchange for immediate income within a year of purchase. An example of this annuity type is a single premium immediate annuity (SPIA).
    • Series of Premiums – When choosing an annuity, owners can contribute a series of payments that will grow tax-deferred over period of years. At a later date, annuity payments will be disbursed to the annuitant. A deferred annuity is an example of this annuity type.

Receive an Annuity as a Settlement Award – Following a lawsuit for a car accident, product defect or workers’ compensation claim, a court may award an annuity meant to provide for the plaintiff’s long-term financial needs.

Understanding the Major Players

You’ll learn early on there are several key players involved in the annuity purchasing process: the insurance company that distributes the annuity, you as the annuity owner, your beneficiary, and an annuity buyer, should you choose to sell your annuity.

Insurance Company

Insurance companies are annuity issuers. These businesses work with brokers, courts and individual buyers to create individually tailored annuity contracts, providing consumers with savings and investment options. They accept premiums, invest some of the funds, and over time provide annuitants with income through a series of payments.


Individuals or defendants pay premiums to insurance companies. The insurance company stores the money in tax-sheltered, interest-growing accounts. At a scheduled time, the owner of the account (which can be you or someone you assign to receive payments) receives cash in a lump sum or through a stream of payments which, in some cases, last through retirement.

Annuity Buyer

Annuity buyers purchase future annuity payments in exchange for advancing cash. They work as a middleman, navigating between annuitants who need money now and companies scheduled to make payments in the future. This arena for selling payments—made up of annuity owners and buyers—is known as the secondary market.


When the owner of an annuity dies, remaining payments often transfer to a spouse or beneficiary. Every annuity contract includes a different set of rules to determine how many payments, if any, are passed on and who will receive them. Riders can also be purchased to increase the amount inherited. Designating a beneficiary helps to avoid a lengthy probate process and prevents remaining assets from being forfeited to an insurance company.

Pros & Cons of Annuities

There are a number of annuity options available to fit your financial needs, all of which have different benefits and functions. We can provide you with an in-depth look at how annuities work, the various types of annuities available to fit your financial needs, and how to sell your annuity payments in the event you need immediate access to cash. Continue reading for a peek at each annuity topic. In addition, if you are grappling with the idea of buying or selling your annuity investment, but are unsure of the process, we can help to guide you on your financial journey. Annuities can be useful in the right circumstances. You should be aware of all their available benefits, as well as their risks and drawbacks.


  • Your money can grow tax-deferred. This means you are spared from paying taxes on the principal growth until you receive income from your annuity.
  • Safe investments generally backed by established insurance companies.
  • Allows income for life, especially useful if you outlive your other available assets.
  • Guaranteed against loss by taking risk out of your hands and transferring it to an insurance company, unless you choose to invest in a variable annuity in which you carry some of the risk.
  • Timed payments minimize taxes.
  • Can be combined with other retirement benefits like a 401(k) or Social Security to pay for medical costs, living expenses and vacations to visit the grandkids.
  • Provides income that allows you to put off other retirement benefits, such as Social Security payments, until you truly need them.
  • Death benefits allow your money to quickly transfer to a loved one after you die, skipping probate.
  • Annuities are another way to contribute to retirement funding if you’ve maxed out contributions to a 401(k) or IRA.


  • Complex financial instruments with expensive fees, commissions and administrative charges.
  • Your money is locked in for a certain period of time.
  • Surrender charges and IRS penalties applied when withdrawing funds before age 59 ½.
  • Relinquish the lump-sum payment option when you buy an immediate annuity or annuitize your deferred annuity contract.
  • Taxes applied to annuity payments may be higher in the future than they are now.
  • Not insured by the FDIC or NCUA.
  • Capital gains on annuities are not tax-deferred and are subject to regular income tax.

How Do Annuities Work?

Annuity owners pay an insurance company regular premium payments or a one-time lump sum in exchange for steady income payments that can last for the rest of their life or a fixed amount of years. For example, a $100,000 annuity can provide an annuitant with about $630 monthly, or about $7,600 yearly. Unlike a 401(k) or IRA, there is no limit to the amount you may put into an annuity. Annuity savings grow tax-free and come with little to no risk. Insurers will work one-on-one with you to set up a schedule tailored to your individual needs. If you want income immediately, plan for payments to start in a matter of months. However, if funds are withdrawn before the age of 59 ½, you will be subject to a 10 percent penalty tax or early withdrawal fee. If you want income once retirement begins, you can initiate payments decades after purchasing. In exchange for securing your finances, you can incur penalties or fees when trying to deduct funds early.