An annuity is a series of payments made at equal intervals. They can be deferred or immediate. Typically, annuity payouts are made monthly. The amount is determined by the value of the contract at the time of annuitization and the terms of payout. Annuities can be scheduled for a certain period, for example, 10 years, or until a certain event such as until the death of the annuitant or second death for joint annuitants. These concepts can be combined so the annuitant can choose a lifetime payout with a period certain, such as, 10 years. In that example the annuitant would receive payments for the remainder of his or her life. If death occurs before the completion of 10 years, the designated beneficiary would receive the remaining payments until the end of the tenth year.
Types of Annuities
Annuities come in different forms such as fixed, variable, and indexed. Gains are generally tax deferred until payouts commence. How the annuity pays out determines what is taxable and what is considered a return of premium. This applies to non-qualified annuities. Annuities in a qualified plan, such as an IRA are treated as distributions and fully taxable for the amount received in that year. Some annuities offer a guaranteed withdrawal benefit (GWB) that cannot be outlived but still provides some flexibility if the contract owner needs to make changes. Often this GWB is based on a guaranteed growth rate that could be higher than the actual cash value.