Annuity

Annuity is a financial product wherein an individual consents to pay premiums to an insurance company in exchange of future income distribution. An annuity has two phases: a deferral phase and an income phase. Deferral phase is the period when an individual deposits money into her annuity account, while the income phase is the period when an individual receives income stream.

One of the best features of annuities is that the premiums are tax-deferred, meaning the money that an individual accumulates are exempted from federal and state income taxes. This allows an individual to delay taxes on her earnings, invest them in her account and increase her future payout.

Annuities also offer options for investments which are called sub-accounts. These sub-accounts are usually in the form of stocks, bonds and money market accounts. Similar to the features of mutual funds, annuity sub-accounts gives an individual the freedom to execute her investment strategies and line them with her financial objectives. The premiums that an individual pays can be transformed from one sub-account to another without any charge or fee, allowing her to keep the investments working.

Annuity, however, is a longer-term financial investment. Insurance companies charge a certain amount when an individual withdraws money more than the contract permits. People who wish to be benefited by an annuity contract must understand that they have to consistently deposit for a long period of time in order to receive a good stream of income in the future.