What is an annuity?

Money Matters

We hear a lot about annuities but what exactly is it?

Well it's like models of cars there's different types of annuities. But essentially an annuity is a contract with an insurance company. There always written by insurance companies that you invest money in. In a broad sense there is a deferred annuity where you just put your money in and let it accumulate with the mind that i'm going to draw it out later. There's also an immediate annuity where the intent is i'm going to create a pension with some of my money. So in exchange for a lump sum of money the insurance company agrees to pay me a life time income. If I pass away they'll pass it down to the family. So in the broad sense there's the deferred annuity and immediate annuities, and there's a whole bunch of subsets.

What are some of the advantages and disadvantages for people maybe considering it?

The disagvantage if you turn some of your lump sum into an income stream an immediate annuity you're giving up some liquidity of your money. There's some ways you can accelerate and get five payments in a row and get your money out. But you are giving up some liquidity. And in the deferred side there's a fixed differed rate, earn a fixed interest rate. And there's also a variable annuity where i'm literally investing in the markets inside this annuity, grows tax deferred. I guess the con there would be to general their surrender charges. So you're tying your money up a little better there.