An annuity is a contract you purchase from an insurance company. You pay premiums over time, and in return, you receive payments after a certain date or on a series of dates.
You can typically choose from a variety of guaranteed* payout options, choosing to receive payments for the rest of your life, a set number of years, or otherwise. You can also choose between “fixed annuities” that offer a guaranteed payout (the safest option), or “variable annuities” with payout streams determined by the annuity’s underlying investments (more risk/reward).
Most annuities have provisions that allow you to withdraw a percentage of the value of the contract each year up to a certain limit, though this will reduce the value of any protected benefits. Excess withdrawals above an imposed limit typically incur “surrender charges” within the first five to 15 years of the contract, so it is important to plan carefully with an advisor to maximize your returns. Annuity withdrawals made before age 59½ are subject to a 10 percent penalty fee, and any withdrawals may be subject to income taxes.
*Annuity guarantees rely on the financial strength of the issuing insurance company. As insurance products, annuities may be subject to fees, certain charges and holding periods. Annuities are not FDIC insured.
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