Understanding Annuities

Welcome to the world of annuity contracts.
An annuity in its most basic form is a financial insurance product that a contract owner purchases to fund their retirement. This purchase is usually handled through a Financial Professional that represents one insurance company or at times multiple insurance companies.

There are several types of annuities usually broken down into two categories:
1. Variable - variable annuities invest into separate account that invest in underlying mutual funds.
2. Fixed - fixed annuities are invested into a separate account that earns interest at a rate of return declared by the issuing insurance company.

Despite their type of either Fixed or Variable all annuities are designed to either provide income now or income later. Those designed for income now are called immediate annuities. Those designed for income later are called deferred annuities.

In deferred annuities, there are usually two phases in the annuity contract's life cycle:
1. The accumulation phase - during this phase, money is invested by the consumer and any gains in the contract grow tax deferred until they are withdrawn. Any gain experienced in the accumulation phase is attributed to the performance of the underlying investment options that are available within the annuity contract and chosen by the contract owner(s).
2. The payout phase - during this phase, the accumulation value of the annuity is converted to an income stream. The amount of the income stream is based on the age and gender of the annuitant(s), the amount of the accumulation value, and the income stream option chosen. The available income stream options vary depending on the annuity contract. The amount of the income stream is usually greater depending on the amount of risk the consumer is willing to take, i.e. the less risk the insurance company has to take on to guarantee an income stream the more willing the company will be to pay a higher income stream.

In immediate annuities, the accumulation phase is skipped and immediately enters the payout phase.

Since an annuity is an insurance product, there are fees associated with owning one that are not typically seen within other financial products such as bank checking accounts, certificates of deposit, mutual funds, etc. These fees consist of administration charges, contract fees, mortality and expense charges, contingent deferred sales charges, rider fees, and more. These fees are used to compensate Financial Professionals for selling the insurance company's annuity contract, to run the company, to guarantee benefits, etc. Since an annuity is an insurance product, it is also not FDIC insured and any guarantees made backed only by the issuing insurance company.

The result of a successful annuity purchase is a contract that governs the ownership stipulations between the contract owner and the issuing insurance company. Upon contract delivery to the contract owner, the contract owner has a set amount of time to review the contract and return it for a refund. This period of time is called the Free Look provision and the length of time available and the amount of the refund is governed by state and federal laws. Once the contract is accepted, the provisions of the contract become permanent from the initial date of investment.