Annuities

An annuity is designed primarily to accumulate funds and/or provide periodic income. Life insurance protects against dying too soon; annuities help address the risk of living too long.

The accumulation phase is when funds grow. The annuitization phase converts value into a stream of income payments.

A fixed annuity provides guarantees backed by the insurer, subject to contract terms. The insurer bears the investment risk associated with the general account.

A variable annuity uses separate accounts and places investment risk on the contract owner. Values and income can fluctuate with investment performance.

An indexed annuity credits interest based in part on changes in a market index, subject to contract formulas such as caps, floors, participation rates, and spreads.

Common payout options include Life Only, Life with Period Certain, Joint and Survivor, and fixed-period or fixed-amount choices.

A Life Income with Period Certain option guarantees payments for life, but also guarantees a minimum period. If the annuitant dies during the guaranteed period, payments continue to the beneficiary for the remainder of that period.

During accumulation, earnings generally grow tax-deferred. When distributions begin, tax treatment depends on whether funds are qualified or nonqualified and on the relationship between principal and earnings.