An insurance contract known as an “annuity” is one that financial institutions sell with the goal of paying out invested money as a fixed income stream in the future.
Annuities are bought or invested in by investors using lump-sum payments or monthly premiums.
A future stream of payments for a predetermined amount of time or for the length of the annuitant’s life is issued by the holding institution.
Generally used for retirement planning, annuities assist people in reducing the danger of outliving their assets.
Annuities are made to give people a consistent cash flow during their retirement years and to allay their concerns about outliving their resources.
Some investors may turn to an insurance company or other financial institution to purchase an annuity contract since these assets might not be sufficient to maintain their level of living.
As a result, these financial instruments are suitable for investors, also known as annuitants, who need a steady, certain retirement income.
It is not advised for younger people or those with liquidity demands to use this financial instrument due to invested cash’s illiquidity and withdrawal penalties.
An annuity goes through several distinct stages and intervals. These are known as:
- the time between when an annuity is funded and when payments start, or the accumulation phase. During this phase, any funds put in the annuity grow on a tax-deferred basis.
- Once payments start, the annuitization period begins.