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Define Annuity: Explain Annuities and How They Work
February 1, 2010

Define Annuity: we can Explain Annuities and how they work pretty simply. Generally, they are a series of payments of set size and frequency. The universal common feature of annuities is the option of the holder or holders to receive assured lifelong income in the form of regular payments from the insurance company. The source of these payments is investments made by the holder(s), either in a lump sum or in a series of contributions to the insurance company. The investment proceeds grow tax-deferred prior to disbursal. When the proceeds are distributed to the holder, investment gains are taxed as ordinary income.

An annuity is a contract, usually sold by an insurance company. An annuity contract involves one or more people and an insurance company. They are designed to provide payments to the holder at specified intervals, often after retirement. Frequently, high-interest annuities become the basis for investments of various types. The annuity holder is only taxed at the point at which they start taking distributions or if they withdraw funds from the account. All annuities are tax-deferred, meaning that the earnings from investments in these accounts grow tax-deferred until withdrawal. Annuity earnings are also usually tax-deferred, but as a result they can’t be withdrawn until a certain specified age without penalty.