An annuity is a contract under which an insurance company agrees to pay income to an individual in return for receiving premium dollars. Many annuities are intended primarily to provide future retirement income. The individual receiving the income may or may not be the owner of the contract. The owner is the person who enters into the contract with the insurer, typically pays the premium, and is responsible for any taxes payable on interest that is part of the annuity payment.
Single Premium Immediate Annuity
A single premium immediate annuity (SPIA) is purchased with a single premium payment, and for which income payments to the payee will commence at once. This is a contrast to a deferred annuity. SPIA are often purchased by someone who has a substantial sum of money from a source such as an inheritance, a life insurance death benefit, a maturing certificate of deposit, or a lump-sum qualified retirement plan distribution.
Deferred Annuity
A deferred annuity is one under which the payout is deferred until sometime in the future. There are two broad types. A single-premium deferred annuity is one that is funded by a single, large premium payment. A flexible-premium deferred annuity is funded by a series if smaller payments made periodically during the accumulation period.
Benefits at a Glance
- A method to accumulate retirement income
- Tax-deferral of earnings while they remain in the contract
- Withdrawal privileges