An annuity is an insurance contract.
This contract is created when an individual makes a payment (or a series of payments) called premium, which will generally grow at a set rate and in a tax-deferred status. In return for this premium, the insurer guarantees periodic payments back to the individual, either beginning immediately or at some future date. The defining characteristic of an annuity contract is the option to receive these payments as a guaranteed income until the death of the person or persons named in the contract.
Annuity contracts in the U.S. are defined by the Internal Revenue Code. They have features of both life insurance and investment products, but are only allowed to be sold by insurance companies. And because insurance companies are regulated by individual states, some contracts, features and options may not be available or may not be exactly the same in all states.
Annuities can be classified in different ways. It sometimes can be confusing, as the types are often mixed and matched to get new features and contracts. When you’re comparing, keep the following broad classifications in mind.
14274-A (06/08)
Note that a 10% IRS penalty may apply to any withdrawals taken prior to age 59½; this penalty would be in addition to any normal taxation of the withdrawal.
The following applies if the annuity is purchased through a bank or a credit union: (a) the annuity is not a deposit; (b) the annuity is not guaranteed by any bank or credit union; (c) the annuity is not insured by the FDIC or any other governmental agency; (d) the purchase of an annuity is not a provision or condition of any bank or credit union activity; and (e) some annuities are subject to investment risk and may go down in value.
Product availability varies by state.