What is an Annuity:

Annuities are long-term, interest-paying contracts offered through insurance companies. They can be "deferred" as a way to accumulate income while you defer taxes, or they can be "immediate" and pay you a consistent stream of income now and for as long as you live.

Benefits of Annuities:

During the "deferral" period, annuities accumulate interest without the earnings being taxed until you withdraw some or all of the funds. Therefore, if you wait until retirement to receive your annuity income, you may be in a lower tax bracket. That's an additional value on the income you receive.

Because earnings are tax-deferred, your money can grow faster in a deferred annuity than in a taxable investment with a similar interest rate. What you would normally lose to taxes remains in your annuity and can generate additional earnings through compounding.

"Immediate" annuities give you an immediate income. They can pay you an income as long as you live, or you can customize the payments to your specific needs. People often purchase immediate annuities with a single premium payment or convert their deferred annuities during their retirement years when they want a consistent stream of income.

Types of Annuities:

With more and more types of annuities available today, how do you know which one is best for you? Some annuities are riskier than others, but may offer higher returns. You need to understand the risk/return ratio of a particular annuity before you purchase it.

Fixed Annuity:

Fixed annuities allow you to accumulate dollars for retirement on a tax-deferred basis. Because you earn a rate of return that's fixed for a particular period, the day-to-day performance of the investment markets won't affect your earnings. Interest earned on contributions accumulates tax-deferred until withdrawn, which helps you accumulate more over the long run.

Market Value Adjusted Annuity:

Market-value-adjusted annuities provide a guaranteed interest rate for a specific period of time. However, if withdrawals are made, or the contract is surrendered before the end of the guarantee period, a market value adjustment (which may be positive or negative) applies to the cash value of the contract.

Equity-Indexed Annuity:

An equity-indexed annuity is a fixed annuity with interest linked to an index like the S&P 500. It typically provides an equity index linked interest with principal and interest protected against index declines.

Treasury-Linked Annuity:

A treasury-linked annuity is a fixed annuity with interest increases linked to U.S. Treasury rate. It typically provides interest with principal and interest protected against U.S. Treasury rate declines.

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