Annuities are financial products developed and sold generally by insurance companies, and they are designed to protect an investor’s principle against the risks of market fluctuations and longevity (life expectancy).
Annuities get their names from a series of payments which are based on an annualized payout rate. Annuities formerly just offered fixed payments for life, like a pension, and they were developed by life insurance companies who would use their mortality tables to determine the payout rates.
Annuities serve as longevity insurance, or the opposite of life insurance. While life insurance adds financial protection if someone dies before their life expectancy, lifetime annuities offer financial protection if someone lives far beyond their life expectancy.
But, similar to how life insurance has taken on many forms of cash-value contracts, when people started wanting more liquidity with their annuity assets, and the laws made more room for such access and options, the annuity market has bloomed into a wide array of products with various levels of guarantees, market participation, and a few kinds of insurance protection.
They grow tax-deferred and can offer protection from creditors, depending on the state. You can hold an annuity inside of various tax-advantaged vehicles such as traditional or Roth IRAs, tax-qualified plans, non-qualified deferred comp arrangements, and so on.
There is a lot to learn, but we will touch on a few of the main points here.
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